Sanctions at Dusk: The Impact of JCPOA on Iran's Private Banks

The Joint Comprehensive Plan of Action— a document comprised of 159 pages, negotiated over 23 months—represents a triumph of diplomacy. It also represents one of the most important single documents ever drafted for Iran’s economy.

The first attachment of the second annex lists the various Iranian entities which can expect to receive tangible sanctions relief beginning on the so-called “Implementation Day,” or the day that the IAEA verifies that Iran has successfully completed the measures required for the curtailment of its nuclear program. Most experts expect implementation to take about six months, which, in the scheme of nearly a decade of biting sanctions, seems imminent. 

Sanctions relief will be operationally significant and allow free and unencumbered transfer of funds to and from Iran, the development of correspondent banking relationships, the facilitation of trade finance, and the reopening of offices and subsidiaries in Europe.

Many banks will even earn bank access to SWIFT, although those that are designated under US Iran Transactions and Sanctions Regulations (ITSR) on the Specially Designated Nationals (SDN) list will only have assured access to SWIFT after “Transition Day,” which can occur as soon as the “Director General of the IAEA submits a report stating that the IAEA has reached the Broader Conclusion that all nuclear material in Iran remains in peaceful activities.” As such, several major banks will be to wage independent campaigns to be delisted in order to gain access to SWIFT.

Even without such financial messaging services, the range of revenue-generating activities within Iran’s banking sector is set to expand. Yet, while the range of operations will expand, it is unclear to what extent Iranian banks will become more attractive targets for investment. 

Looking to specific banks that are set to benefit from the JCPOA, the private banks listed on the Tehran Stock Exchange deserve particular mention. These include Eghtesad Novin (EN) Bank, Karafarin Bank, Khavarmianeh (Middle East) Bank, Mellat Bank Pasargad Bank, and Parsian Bank.

Mellat, Eghtesad Novin, Parsian, and Pasargad Bank rank among the 30 largest companies on the TSE measured by market capitalization, and when accounting for Khavarmianeh and Karafarin Banks, the total market capitalization of these firms approaches USD $10 billion.

With a wider range of banking activities available, these companies will become more attractive investment targets for individuals and institutional investors within Iran. Therefore, we should expect Iran’s banking sector to grow as a percentage of the overall economy in the next 1-2 years as domestic investment drives growth and rising valuations.

However, it is unclear if foreign investors will be among those to invest in Iranian banks. A research note from Renaissance Capital predicts that Iran will see “$1 billion of inflows to equities within a year of sanctions ending” from foreign investors, and overall “portfolio flows could be significant as early as 2016.” However, although Global Chief Economist Charles Robertson, expects, “investors to explore opportunities ahead of time, find custodians and earmark key stocks to buy” he doubts that these target stocks “will include many banks.”

The question is whether Iranian private banks are a high-risk or low-risk investment. On one hand, the regulation of the banking sector and shareholder insistence on a degree of financial transparency will mean that Iranian private banks are probably easier due diligence targets than many of the listed Iranian industrial conglomerates. The operations of the bank itself are probably not a major source of risk. This is in contrast to the much-vaunted infrastructure, energy, and extractive industries where operations can be byzantine within sprawling companies working across many verticals.  

However, two other areas of risk will remain. First, many Iranian private banks have major shareholders or clients that are quasi-state funds or holding companies. For example, 30% of Mellat bank is held by “provincial investment companies,” which are entities that hold “justice shares” designed to benefit the “poorest members of society.” The justice shares program, begun under the populist economic policy of President Mahmoud Ahmadinejad, which will remain a barrier to foreign investors who will see shareholding as exposed to ongoing political risk and issues such as money laundering. 

Additionally, the presence of particular Iranian institutional investors can also expose investors to legal and political risk. Parisan Bank is 10% owned by Tadbir Investment Company, a holding company long on the radar of the US Treasury Department for its connections to Iran’s political leadership in the form of quasi-state control. 

Furthermore, at a practical level, most Western investors will rely on professional portfolio managers in order to gain exposure into the Iranian market. As a recent client brief on the JCPOA from the UK law firm Stephenson Harwood notes, EU banks have been “subject to investigations by US regulators” and are “generally now taking a more risk averse approach.” As such, “time will tell what appetite there is for reengagement with the Iranian banking sector.” If there is a diminished appetite for correspondent banking, trade finance, and insurance, it is unclear how European investment banks and asset management firms will approach Iran’s equities markets. Most likely, only investors with an appetite for risk, working through emerging markets specialists, will be seen investing in Iran in the next 1-2 years.

Two actions will need to be taken for Iran’s private banks to become destinations for foreign investment in their own right. First, US and EU authorities, in the lead up to “Implementation Day” will need to announce guidelines and make public statements that will enable a better understanding of the legal and political risk landscape as it pertains to Iran’s financial sector. Second, Iranian banks must actively optimize their corporate structures, reporting practices, compliance regulations, and shareholder compositions to ensure that they can be perceived as a “safe” bet with a suitably attractive set of risk and reward.

Many have said that JCPOA is an agreement based on verification, rather than trust. The same commitment to verification will be necessary for Iranian banks to prove their worthiness to investors looking for post-sanctions wins.

Photo Credit: Unkown 

Don't Fear Iran's Impending Windfall

This article originally appeared in LobeLog.

As Iran and the P5+1 look set to complete a historic nuclear agreement this week, the policy community in the US and Europe is very fearful that sanctions relief will provide Iran a dangerous windfall that it can use to expand its interventions in the region.

But these concerns fail to recognize that Iran’s post-sanctions windfall will be domestically driven, will generate private investment, and will transform Iran’s political economy for the better. A nuclear deal will actually help repair the broken relationship between consumption, savings, and private investment in Iran. 

Since the imposition of broad financial sanctions on Iran in 2012, Iran’s gross national savings has fallen from 45% of GDP in 2011 to just 33% in 2015, according to data from the IMF. The drop in the savings rate has limited the capital available for business to invest for the future. The contribution of investment to Iran’s GDP fell 5% between 2011 and 2015.

To compensate, Iran’s economy has relied on consumption, particularly household consumption. Between 2013 and 2014, the share of household consumption as a proportion of Iran’s GDP jumped from 45% to 52%. Additionally, despite shrinking budgets hit by a sharp decline in oil revenues, government expenditures remained relatively stable, dropping slightly from 16% of total GDP in 2011 to 14% in 2015.

Consumption, however, does not help create long-term value for Iran, especially when the goods consumed include frivolous imports like foreign cigarettes and luxury cars. Imports were valued at 17.1% of GDP in 2014, equivalent to a fourth of consumption.

If Iran is going to mature into a diversified and competitive economic power, it will need significant investment to produce better goods and services domestically, especially in the private sector. To achieve this, Iran must grow its savings rate relative to consumption to free up financing that can spur private investment in capital assets and research and development.

Given that trade and foreign direct investment account for very small proportions of Iran’s GDP—a combined 2% in 2015—even large shifts in trade and FDI won’t have a major impact on Iran’s economic development in the near term. Even oil rents only account for 30% of Iran’s GDP, substantially less than household spending at the current time.

As such, the true engine of Iran’s post-deal economic growth will be the domestic shift from consumption to saving at the level of individual households. Households ought to seek long-term prosperity. Should they choose to save slightly more, either through bank deposits or through the purchase of securities or debt instruments, more capital would be available for enterprises, unlocking the second attribute of Iran’s nuclear windfall—private investment. 

But if domestic macroeconomics trump capital inflows from the US and Europe, why is a nuclear deal important at all? How will sanctions relief affect the decision-making of Iranian households to encourage savings? The answer has to do with individual behavior.

The Short-Term Mindset

Years of economic stagnation, exacerbated by sanctions and intense domestic politicking, have conditioned most Iranians to think about personal finances with a short-term mindset. Iran’s high inflation means that money loses value over time. The country’s banking system had tried to counter this with interest rates that reached 22%. But this has had the effect of increasing the cost of financing for businesses, and inflation has remained high enough to still undercut significantly the expected return on savings for the average Iranian.

Weakness in the banking system is also reflected in the financial markets. Consider the Tehran Stock Exchange (TSE), which has a total capitalization of around $100 billion. This figure is dwarfed by the $600 billion capitalization of the Tadawul stock exchange of Saudi Arabia, a market with similarly low levels of foreign investment to-date. The GDP per capita in Saudi Arabia, measuring in purchasing power parity, is about $52,000. In Iran, the figure is $17,000 dollars. So while Saudi’s stock market is 6 times better capitalized, Saudi citizens exercise just 3 times more economic might. This suggests an untapped potential for corporate capitalization in Iran, long hampered by low levels of investor confidence. 

Importantly, the Rouhani administration recognizes these structural problems and has worked laudably to introduce better monetary policy. Since 2013, the inflation rate has fallen from 42% to 15% and the administration recently agreed to lower interest rates from 22% to 20%. In 2013, the TSE reached historic highs on the basis of investor optimism around Rouhani’s economic reforms and the prospect of sanctions relief through the nuclear negotiations. This optimism has since cooled, and the TSE is down about a third over the last 18 months.

However, the conclusion of the JCPOA agreement in April of this year, which set the parameters for an eventual comprehensive nuclear deal between Iran and the P5+1, led to a 7% jump in the TEPIX index in just two days. A robust nuclear deal will no doubt kick-start trading on the exchange. The challenge will be to convert investor confidence into sustained behaviors—to temper wasteful consumption and support prudent savings.

The Opportunity Cost of Consumption

The key microeconomic issue that needs to be addressed is the opportunity cost of consumption. As seen above, there is currently little incentive for an Iranian individual or household to deposit or invest money. There are few options to turn cash into an asset that will generate a meaningful or reliable return. Even capital flight, a perennial problem for recessionary economies, has been thwarted by financial sanctions. Therefore, the tendency has been to convert cash into property or gold, which store value against inflation. But this kind of saving does not contribute to private investment.

Given the low opportunity cost of spending, individuals and institutions adopt short-term thinking. When members of the Iranian elite have $200,000 dollars, they might as well buy a Porsche. These elites have no reason to behave like the so-called “job creators” that a market economy relies on, investing in their own businesses or those of others. In this way, consumption suppresses savings, which in turn reduces the available capital for investment.  

There is a corollary to this behavior among key institutional actors as well. Consider the Revolutionary Guard’s spending on its proxy militias, the same spending that policy analysts are concerned will increase following a nuclear deal windfall. The commercial monopolies operated by the military-security faction in Iran have no incentive to reinvest any profits from rents and revenues—there is no effective competition in the market. Without the need to grow its economic capital, the Guard and its affiliates focus on two activities. First, they spend within their own patronage networks in an aim to turn economic gains into political capital. The funding of foreign fighters is just a politically potent version of this consumption. Second, they entrench rent seeking through the control of grey market speculation that feed the unfettered need for Iranians to consume everything from cigarettes and luxury cars to real estate.

At a behavioral level, whether we look at the scion buying a Porsche or the general funding a militia, the inability to build true wealth leads to a fixation with appearing more powerful through prestige and patronage, the dominant currency of political capital in Iran. Yet, regardless of the purchased prestige, neither an armed fighter nor an imported Porsche makes society at large better off. This is perhaps the greatest weakness in Iran’s political economy, the way that the economic creates structural incentives for the country’s politics. 

New Incentives, New Behaviors

But there is cause for optimism. The post-deal windfall will initiate a profound change in the current short-term mindset. As growth and investment begin to accelerate, the opportunity cost of consumption will increase. Every dollar spent in the present will forgo future returns. Consequently, in an environment where wealth creation is possible, individuals and institutions will change their behavior and begin to invest a larger portion of their wealth in order to secure greater economic power relative to other economic actors—the kind of competitive investment that creates jobs and drives further growth. Crucially, it will soon be savvy investment and value creation, rather than conspicuous consumption, which will define power and prestige in Iran.

The knock-on effects for Iran’s political economy could also be profound. The greater the degree to which the full range of Iranian citizens, who currently inhabit separate political and economic classes, invest in a marketplace like the TSE, the less reliant on patronage networks they become. Instead, everyone from schoolteachers to Revolutionary Guard commanders will become shareholders of a more political neutral type of capital. The segregation within Iran’s political economy, determined by the sources from which people earn their livelihoods and derive their wealth, will diminish as a prima-facie, structural reason for political antagonism between citizens.

Iran’s domestic windfall should be welcomed as the first step in a post-sanctions era of new priorities and new possibilities. No doubt, foreign trade and investment will make its contribution. But Western political and economic analysts should understand that the creation of a more prosperous and productive Iran will be led from within through incremental but profound changes in the relationship between macroeconomic conditions, microeconomic behaviors, and the political economy as a whole. 

Photo Credit: Vahid Tajik, Pinterest

British Business in Iran: Time To Set Sail

Since the singing of the Joint Plan of Action agreement between Iran and the P5+1 in November 2013, European businesses have intensified their efforts to identify commercial opportunities in Iran. Trade delegations and fact-finding missions have become common. Even the CEOs of the world's top energy giants are traveling to Iran to conduct high level negotiations. 

Yet, as French, German, and Italian companies have begun to scour the landscape in Iran, British companies have been largely left behind. For years, the British Foreign and Commonwealth Office (FCO) has taken the strictest stance in Europe when it comes to commercial engagement of Iran. The standing advice has even been to avoid business that is currently permissible under general or specific exemptions from US, EU, and UN sanctions. 

But in the last few weeks, there has been a shift. Perhaps recognizing that after two years of negotiations, a comprehensive nuclear agreement is just days away, the FCO has changed its tune. British businesses are now receiving advice to explore Iran opportunities —albeit responsibly and in accordance with standing sanctions regulations — in order to prepare for a Iran's reentry into the global economy. This marks the latest development in the slow, but continuing repair of long strained UK-Iran ties. 

With the door having been opened, British companies risk losing a key business advantage to their competitors in other Western states such as France and Germany if they do not act quickly. 

There is a general consensus among experts and observers that that a nuclear deal is in reach and will be formalized in due course. Though implementation timetables mean this means that sanctions relief will not arrive until the end of 2015, the economic landscape in Iran will shift considerably even prior to full sanctions rollback. Companies will need to assess commercial, legal, and political risks and opportunities in the coming months to prepare strategy for 2015 and beyond. 

Iran is a unique country with both massive energy reserves and a large and dynamic consumer market. It therefore has immense potential to be a trading partner with Europe and the wider world. Prior to the 1979 Islamic Revolution, British businesses had a strong presence in the country. One reminder still seen on Iran's roads is the historic "people's car" of Iran, the Paykan, which is based on the British Hillman Hunter. 

But since the revolution, and certainly since the imposition of broad sanctions on the country, British business have ceded ground to French, German, and Italian conglomerates. This is despite the fact that British expertise in engineering, consumer brands, financial and professional services, pharmaceuticals and healthcare products, and other goods and services would be highly exportable. 

So what should British businesses do?

The short answer is to engage with Iranian counterparts at the first opportunity.  There is no barrier to speaking about potential business opportunities that may emerge following sanctions relief. Business can even currently be conducted in sectors such as retail, healthcare, and agriculture,  which are subject to more limited sanctions.

Having just returned from a weeklong visit to Tehran where we enjoyed excellent access to both the private sector and government, we conclude that productive conversations can be had with Iranian business leaders about future opportunities across sectors ranging from tourism to energy. The opportunities are clear and very attractive. The challenge is finding the right partner and devising the right market strategy. 

Encouragingly, the attitude of the senior decision makers within government, across various ministries, was collaborative. The current administration has an outgoing and open attitude towards international investments and long-term partnerships between Iranian and Western businesses. 

Therefore, if British companies want to deal with Iran they should start building relationships now (whilst also taking care not to fall foul of the sanctions legislation before it is lifted). Securing reliable legal counsel is a key part of market exploration. 

Due diligence measures will also play a large role in creating an Iran strategy. British companies need to be prepared for the almost Darwinian process of weeding out the superfluous middlemen in order to identify those individuals with the background and capability to facilitate and execute a deal. For effective relationships to be formed, both sides will need to establish a level of mutual trust and understanding. 

However, within large companies, this process will raise the alarms of compliance departments, who have long resisted engagements with Iran. Business development directors and executives with foresight will need to be able to tackle internal resistance as effectively as external challenges. 

The hesitation on the part of British business is shortsighted, however, especially if a robust deal is agreed between the world powers and Iran. For the sake of needless conservatism, British companies risk losing a key business advantage to their competitors in other Western states such as France and Germany. 

Is it too late for the British to compete in the Iran gold rush?

There seems to be a growing fear among business leaders in London that Britain will be left behind in the Iran gold rush. But what should not be forgotten is the scale of opportunities available in the Iranian market. Contrary to popular belief, there are more than enough opportunities for all to benefit from a post-sanctions Iran. However, this does not mean that taking a passive approach will be advantageous. Building relationships now will help reduce risk for a future market entry. The learning curve will be steep. 

Finally, though the focus tends to be on Western companies interested in entering Iran, we should not disregard the many Iranian firms with serious products and services are preparing to engage global markets. The entrepreneurial class in Iran has global ambitions, and like their peers in markets around the world, London will be a natural base from which to devise international expansion. The gold rush therefore may work in two directions, and Britain should prepare to host.

Photo Credit: Timothy Clary, EPA

Arab Business in Iran: Looking Beyond Regional Rivalry

With high disposable incomes furnished through oil rents, the GCC economies are geared towards the consumer. Famed for massive malls, expensive cars, luxury housing, and entertainments galore, perhaps no other group of countries around the world are as defined by such conspicuous consumption. To underscore the point, a recent report by Global Footprint Network, an environmental protection institute, suggests that if every person in the world consumed resources at the same level as Emiratis, we would need 5.4 planet earths to sustain humanity.

Created to answer this insatiable demand, the GCC region's most successful conglomerates are not in manufacturing or industry, but in consumer-focused sectors like food service, real estate, hospitality and leisure, luxury retail, and FMCG.

Given that Iran has a large consumer driven economy, with a middle class that will benefit from post-sanctions economic growth, GCC companies are actually very well positioned to transfer their knowhow to the Iranian marketplace. A recent study of which companies would most quickly benefit from an Iran deal was “loaded” with GCC companies, particularly those based in Dubai.

This fact complicates the political economy of regional relations in the Perisan Gulf region. Most analysis focuses on the increasing rivalry between Iran and the Gulf states, especially Saudi Arabia. However, the prospects for business tell another story, in which trade and investment can aid the development of a regional geopolitics based on mutual gain rather than mutual antagonism.

To illustrate this point, below are 5 leading companies from the GCC, which could make it big in Iran due to their consumer driven businesses.

It remains to be seen if opportunities in Iran will be enough to outweigh the rivalry in regional politics. But it wouldn't be the first time that commerce has overcome conflict.

• Majid Al Futtaim Group, Dubai, UAE- Retail Development

Revenue: USD $6.8 billion 

A holding company specializing in large-scale retail and hospitality projects, MAF Group owns some of the iconic malls and hotels in the Middle East. While we might imagine an MAF backed five-star mall development in Iran one day, it is MAF’s longstanding role as the regional partner for French hypermarket chain Carrefour that has won them early success in Iran. With the first store opening in 2009, a subsequent $400 million dollar investment has seen hypermarkets open in Tehran, Shiraz, and Esfahan. The company boasts of plans to open 15 more locations, and aims to dominate the sector with a mix of hypermarkets and smaller supermarkets.

• Aujan Group Holding, Dubai, UAE- FMCG

Revenue: USD $200 million (Iran entities only)

Continuing the FMCG theme, another Arab success story in Iran can be seen in the experience of Aujan Holding Group, the regional partners for The Coca-Cola Company, which purchased 50% of the Aujan Industries subsidiary in 2011 for nearly USD $1 billion. A separate Iran-registered joint stock company, Aujan Industries Iranian Company, is the manufacturer and distributor of Rani and Coca-Cola beverages in Iran.  Importantly, Coca-Cola’s tie-up with Aujan excluded the Iranian business. This leaves the door open to future capitalization and expansion, as Iran exhibits the second largest absolute value growth in MENA region soft drinks in the next few years.

• Olayan Group, Saudi Arabia- FMCG and Food Service

Revenue: Undisclosed

A diversified Saudi conglomerate, Olayan has operations in everything from business services to construction. But it is the group’s holdings in fast-moving consumer goods (FMCG) and food service that position it for an Iran market entry. In the area of consumer goods, Olayan has longstanding relationships with global giants such as Mondelez International, Nabisco, Kimberly Clark, and Colgate-Palmolive. These US-based multinationals have limited exposure to Iran’s market, and Olayan’s local supply chain could be adapted to ensure distribution to Iran. But perhaps more uniquely, Olayan is the regional franchisee of Burger King. The first firms to rollout globally recognized fast food and fast-causal chains in Iran will tap into a massive unmet demand, and Olayan is a company with the muscle to do so.

• RAK Ceramics, Ras al Kamiah, UAE- Ceramics

Revenue: USD $1 billion

It is a little known fact that the largest ceramics manufacturer in the world is located in one of the lesser-known Emirates. RAK Ceramics produces everything from toilet bowls to tableware in over 8000 designs. RAK Ceramics has a presence in Iran, but tough economic conditions and supply chain issues have depressed profits this year. The company has begun scaling back its Iran operation. RAK Ceramics boomed on the back of procurement in the GGC, as large-scale residential and hospitality developments mushroomed. In this way, the supplier’s success is connected to consumer demand. Similar construction volumes could be expected across Iran’s multiple metropolises in a post-sanctions environment. As a global leader, RAK Ceramics is certainly poised to benefit as this massive market on its doorstep becomes easier to engage.

• Damac, Dubai, UAE- Real Estate Development

Revenue: $556 million (Damac Properties only)

With over 100 buildings either complete or nearing completion, Damac has emerged as a leader in Dubai’s crowded real estate development market. Until now, groups like Damac have seen Iran as a source of high network individuals, eager to establish a residence in Dubai. But looking forward, economic growth and freer financing will make Iran the next big real estate story in the Middle East. As a private entity, Damac is likely to be less entangled in the political battles between Abu Dhabi and Dubai on the issue of engaging Iran. This differentiates it from Emaar, with its legacy as a formerly 100% government owned entity. Investors are taking note. The listed entity Damac Properties Dubai saw its stock rise over 8% immediately following the conclusion of the April JPOA framework agreement between Iran and the P5+1 powers. 

Photo Credit: Koroush Complex

Newfound Urgency: 4 Steps for Western MNCs in the Iran Market

In a recent benchmarking study conducted by Frontier Strategy Group, more than 80% of the 28 multinational companies (MNCs) surveyed said they are focused on reassessing their strategic plans for Iran. These recent survey results, along with anecdotal evidence provided by my daily conversations with clients on investing in Iran, indicate an unprecedented interest from EU- and US-based MNCs. There is good reason for this newfound urgency.

Even if a final nuclear deal is reached by the June 30 deadline or after another extension, it will be hard to anticipate an exact timetable for sanctions relief in Iran. Yet there is a growing consensus among senior executives that any market share won in 2016 or 2017 and profitable growth from 2018 onwards, would be the result of strategic planning that must take place right now.  As a result, MNCs are prioritizing ready-to-execute Iran plans.

For example, a pharmaceutical company that is already allowed to work with a local distributor could assess ways that the partnership could expand once sanctions relief creates the appropriate conditions to do so. Other MNCs, especially in technology and industrial sectors, are not afforded the same opportunities given the stringent international sanctions regime that keeps them out of the market. However, senior executives from these companies are able to prepare in several other ways, including through visits to Iran, conversations with peers who are doing business there, and beginning to identify potential local partners.

In all instances, we are seeing a hunger among executives to ensure they are closely adhering to established sanctions parameters while at the same time readying their organizations to better understand and ultimately succeed in Iran. This balancing act is not an easy task, especially when you consider different dynamics presented by a company’s country of origin, industry, size, local experience, and risk appetite.

Because there is no one-size-fits-all approach to Iran, FSG has developed a four-step process to help our clients determine the right way to structure effective plans for the Iranian market. The rest of this blog post outlines a simple, four-step process that any foreign MNC can use to structure or pressure test their Iran plan.    

Step 1: Confirm Market Opportunity

Despite Iran’s huge potential, the market will not be worth the risk for every foreign company. We advise MNCs to evaluate where they fall on an Iran risk spectrum by answering key questions related to industry opportunity, market prioritization, risk appetite, and organizational resources. FSG designed a short questionnaire to help senior executives pinpoint where their organizations fall on the risk spectrum, and to challenge pre-conceived notions about whether or not Iran should remain off-limits if sanctions are lifted. Given the unprecedented level of MNC focus on Iran planning, most companies we’ve spoken to move on to step two.

Step 2: Establish Working Group

The best way to align an organization on what is required to prepare for Iran’s complex operating environment is to establish a cross-functional working group. This step is especially critical for larger MNCs that could face an uphill battle in navigating organizational bureaucracy. Participants in such a group will vary by company, but it could include: Head of Middle East North Africa and/or Europe, Middle East, and Africa; Head of Strategy; Chief Financial Officer; General Counsel; Heads of Business Units, and any other relevant senior management. Setting a clear mandate upfront is important in order for the group to achieve goals, such as streamlining internal communication on Iran, educating the rest of the organization on opportunities and risks, and building or updating the Iran plan.

Step 3: Gauge Organizational Readiness

To be successful in Iran, senior executives will need to understand exactly where there are organizational strengths and weaknesses in their entry or expansion plan. To assist in this process, FSG created an “Iran readiness diagnostic” for our clients. The self-assessment tool allows senior executives to measure their level of confidence in addressing several key areas of Iran planning, such as strategy, finance, legal, operations, and customer segmentation. Typically, MNCs find that they are prepared to answer some, but not all questions that are required to build or update an effective strategy for Iran. While results will vary from company to company, this type of objective evaluation is critical for all senior executives seeking to prepare their companies for Iran.      

Step 4: Develop Action Plans to Close Gaps in Iran Strategy

MNCs can use results from step 3 to begin closing the biggest gaps in their strategic plans for the Iranian market. First, senior executives should use the self-assessment results to align their organizations on where internal resources must be directed for Iran planning. Next, Iran working groups should prioritize which areas must be addressed and the required timelines before Iran entry or expansion is even possible. Finally, resolving these key questions should be done through comprehensive action plans that outline relevant analysis, follow-up steps, timelines, and key stakeholders involved.

Let the Buyer Beware

With Iran’s market opening likely to occur gradually after any finalized nuclear deal, foreign companies must be prepared with flexible entry or expansion plans to stay ahead of fierce competition. Given the Iranian market’s complexity, the traditional approach to strategic planning will not succeed. The four-step process outlined in this blog post is one way to compensate for the likelihood of a challenging and shifting Iranian investment climate in upcoming years. Without thoughtful plans prepared ahead of Iran’s opening, MNCs could expose themselves to a number of serious compliance and operational risks that would reverberate negatively across their organizations.   

Photo Credit: Frontier Strategy Group

Chinese Invasion: The Future of Iran's Auto Industry

I have been an avid auto Iran industry watcher in recent years, and with sanctions relief on the horizon, opening the door to a more mature industry, it seems anything is possible.

Case in point is the announcement this week by Saipa, Iran's second largest auto producer, of a joint venture with a Chinese company called Brilliance. The two firms launched production lines for two new medium sized cars based on Brilliance designs.  

The very announcement of the production of the Chinese cars has changed the playing field. For decades, the majority of so-called “montage” cars manufactured in Iran have been based on European designs. The arrival of Chinese designs both underscores the growing technical capacity of the Chinese auto industry, as well as the aggressive position Chinese companies are taking in Iran.

I previously wrote an article highlighting Peugeot's ultimately precarious position in the Iranian market. In that article I discussed two trends evidenced by the Saipa/Brilliance announcement. First, I mentioned that Peugeot's long standing position of de facto Iranian car maker, was becoming more precarious by the week, and secondly I pointed to the rise in popularity of affordable Chinese brands.

Perhaps Saipa's announcement of the ultra-affordable Brilliance cars (priced at under USD $10,000) is the first sign in the future dominance of Chinese brands.

The arrival of Chinese montage manufacturing now puts the ball in IKCO-Peugeot's court. Can they offer the same variety of cars at such affordable prices? A look at their new offering directly imported from Europe suggests they cannot. IKCO has touted repeatedly over the past 6 months about two specific models; The Renault Clio 4 and the Renault Captur, both originally hotly anticipated by the auto enthusiasts in Iran.

The fact remains that both of cars have failed to appear on the streets and their original estimated prices have grown incrementally with the months. The Captur has been pegged at just under 900 million rials or USD $30,000. Given the continuing hardships in Iran's economy, this price positions the Captur as a luxury model. But the fact remains that the Captur is not a luxury car. 

The vast majority of car owners, desperate to offload their ageing Peugeot 206s, are definitely looking for a replacement, but will be loathed to spend three times the amount of the Brilliance design, a more direct replacement for the 206. Presumably Iran Khodro and Peugeot have other plans up their sleeves, though their reticence to push forward with offering new vehicles is giving Saipa the lead.

The two Chinese cars in question highlight the change in the markets ability to respond to need, or that or Saipa's ability to respond to demand. But, it's not all rosy for the likes of the Chinese firms, as scepticism about the quality and sustainability of their investments in Iran rises among the political and economic ruling class. 

Recently, an article published in the Financial Tribune quoted the head of the Auto Parts Association of Iran, Arash Moheebi-Nejad, as saying that Iranian buyers would likely buy European cars over Chinese largely because of cultural affinity. 

Besides sanctions, there is the issue of financing. As the rial has deeply depreciated against the US dollar in recent years, manufacturers' purchasing power and cash flow have decreased year-on-year, Moheebin-Nejad noted.  "To boost the manufacturing sector, we need fresh financial resources so that dilapidated infrastructure can be renewed." Also, he added, "the sector must further benefit from contemporary global science and technology."

The statement by Moheebin-Nejad was a warning shot by the auto part manufacturers to the auto producers not to not jump in bed with the Chinese, who will privilege their own parts manufacturers, thereby reducing the prospects of Iran's domestic industry. 

The local industry already under financial strain due to being owed money by the main auto players are now about to see their market share shrink further.

Moheebin-Nejad was not alone in his criticism of Chinese auto makers. In an news story published in April by IRNA, Sassan Ghorbanim the secretary general of the Iranian auto parts group said that Chinese cars "must reduce their prices by up to 20 percent" if they are to adequately incentivize Iranians away from more "loved European brands." 

The Peugeot 301, pegged as the replacement for the  Peugeot 405, with its 30 year old design, continues to be absent from Iranian dealer's lots, be it down to financial restrictions on the market, sanctions clogging up operations, or general hesitance on the part of Peugeot. In any case, the French are ceding market share to new entrants. 

Looking at the rise of "Auto China" through the Iranian lens, misses the wider point. Audi, Mercedes Benz, Range Rover, BMW and a numerous other car buyers companies have set up production lines in China. This is proof of the maturity of Chinese manufacturing knowhow and integration into global supply chains. Moreover, the Chinese have already bought the Saab and Volvo brands outright. 

Then one must consider Peugeot again. The April announcement  that the French auto maker is undertaking a joint venture with Dongfeng motors, indicates the Chinese auto market is only going to grow in importance. Peugeot has traditionally seen Iran as their second largest market up until 2013 when sanctions were placed on Iran's auto makers. However, if manufacturing ramps-up in China, and continues to stagnate in Iran, this will no longer be true. 

“It has been exciting and rewarding,” said Peugeot Chief Executive Carlos Tavares, referring to the first year of the partnership. “Our sales in China are quite significant and still growing so it’s an important contribution” to the recovery of PSA.

So Iranians should expect to see more Chinese cars on the street, and perhaps the next batch of Peugeot cars will be Chinese produced and delivered at Chahbahar. In the long run whether Iran's auto part makers like it or not, the Chinese are here to stay and the Brilliance/Saipa tie-up is just the beginning. 

Photo Credit: Realiran.org

Long Walks on the Beach: Maritime Tourism in Iran

The tourism industry generates over USD $6.5 trillion globally and today accounts for a significant part of direct and indirect revenues of many countries. For even substantial countries like Italy, Turkey, or Malaysia, tourism is among the main sources of economic value, as measured by contributions to gross domestic product (GDP).

This article will take a look at maritime tourism in Iran to understand the economic potential of Iran’s beaches and seaside. As a country with great natural beauty, an inviting seaside climate, and extensive coastlines, Iran is well positioned for maritime tourism on both its northern and southern coasts.

In a global context, research shows that investment in the tourism industry has consistently been a safe bet. In 2012 the number of tourists around the world exceeded 1 billion. According to the statistics of World Tourism Organization (UNWTO), for every tourist, 2 to 6 direct jobs and 9 to 15 indirect ones (including both skills and service-oriented professions) are created.

This industry, with all its extensions such as hotels, restaurants, shopping centers, travel agencies, along with all entities related to leisure activities and transport can make a great contribution to a country’s economy.

Within the region, Iran’s Persian Gulf neighbors Qatar and the United Arab Emirates, have made significant commitments to the development of their tourism industries, turning revenues from oil and gas into the budgets for national airlines, massive hospitality developments, and attractions like the Dubai 2020 World Expo and the Qatar 2022 World Cup.

In comparison with these massive projects, and despite huge potential, Iran's income from the tourism sector was only about USD $1 billion last year (the figure is inflated to USD $5-6 billion according to Iranian sources). But, encouragingly, projections suggest that the figure could rise to USD $20 billion by 2025. Maritime tourism will play a key role.

According to industry research, the definition of maritime tourism is as follows:

Maritime or marine tourism is one sector of the tourism industry that is based on tourists and visitors taking part in active and passive leisure pursuits or journeys on or in coastal waters, their shorelines and their immediate hinterlands. Marine leisure is a collective name for a full range of activities or pursuits that are undertaken by local people, tourists, and day visitors in these marine related localities.

In Europe alone, the maritime tourism sector employs over 3.2 million people and generates a total of € 183 billion in gross value added (GAD). As such, tourism represents over one third of the overall maritime economy. As much as 51% of bed capacity in hotels across Europe is concentrated in regions along the seashore.

As part of European Union's Blue Growth strategy, the coastal and maritime tourism sector has been identified as an area with special potential to foster a smart, sustainable, and inclusive Europe.

Countries with developed marine tourism constantly try to come up with new ideas and strategies to further expand this sector of the industry. For instance the EU Commission adopted a Communication on "A European Strategy for more Growth and Jobs in Coastal and Maritime Tourism" in February 2014, presenting a new strategy to enhance coastal and maritime tourism in Europe in order to unlock the potential of this promising sector. The communication was the result of a public consultation launched on European Maritime Day in 2013.

A similar strategy of public outreach and multi-stakeholder planning ought to be undertaken in Iran.

Iran enjoys hundreds of kilometers of superb coasts, with the world's largest lake, the Caspian Sea, in the north, and the beautiful coasts of the Persian Gulf in the south. These regions could benefit greatly from the income of maritime tourism provided the development of infrastructure and facilities required for expansion of the sector. Unlike many countries, Iran has two distinct coastlines, with different seasonal qualities and recreational opportunities.

But a lot of development work is needed. Safety is one of the most critical areas to properly develop before marine based tourism can succeed in Iran. The nearly 5000 km of coastlines in Iran call for the establishment of coast guard and search and rescue teams at Iran’s ports—with the requisite training and vehicles to enforce and monitor tourist safety.

The statistics on the casualties along Iran's shores should undoubtedly alarm officials and compel them to further and more precisely address the safety and security issue in maritime travels. Tourists, who are not familiar with the dangers of particular areas, remain 4 times more likely to drown than locals along parts on Iran's coast. Until safer conditions are in place, many Iranian and international travelers will continue to choose other countries seeking a seaside vacation where fewer risks (and better amenities) may await them.

Only when the safety concerns have been addressed will the efforts of Iran’s Ministry of Tourism succeed in coordinating investment opportunities to develop hospitality and leisure facilities along the Iranian coast. Areas like Kish have long been envisioned as a tourist paradise, but have yet to reach their full potential.

By developing its maritime tourism sector, Iran could not only tap into significant economic growth, but also present a better image of the country to visiting tourists from around the world.   

Photo Credit: IranTours.com

The Politics of Sanctions Relief in Iran: Three Roles for the Private Sector

As politicians and analysts consider the wisdom of offering Iran sanctions relief in exchange for restrictions on the country’s nuclear program, a key stakeholder group remains unaccounted for in the debate – the private sector.

Iran’s private sector stands to gain the most from sanctions relief, and they are uniquely positioned to advance the agenda of normalization through their interactions with both domestic and international business people. Corporate leaders are poised to play three vital roles— interlocutors, stewards, and creators—without which the long awaited nuclear deal will not successfully improve the economic situation in Iran in the way many Iranians anticipate. Policymakers must take account of the relationship between sanctions relief and private sector leadership for the deal to have its much-awaited impact.

In the aftermath of a deal, Iran’s private sector business leaders will be the ideal actors to pick up where the diplomats leave off. These individuals, with global outlooks and ambitions, have already begun reaching out to their peers in the West. And while this outreach is primarily about securing new investment and business opportunities for themselves, it also offers an opportunity to present Iran in a new light, and undo the effects of political vilification and cultural misconception. 

The notion of “business diplomacy” has emerged in the last decade as a serious topic of strategic thought, suggesting that the business executive can serve as a special kind of “ambassador.” And in the transition from high-stakes diplomacy to the “business as usual” mentality expected from a détente between Iran and the West, business diplomacy is the essential intermediate step. 

But in order to take on this role, Iran’s private sector business leaders will need a place at the table.  They must be welcome to visit Western countries much the same way American and European trade delegations have begun visiting Iran. Sanctions, stigma, and arcane visa policies should not prevent an Iranian CEO from coming to London, Paris, or New York to discuss his country and his company in the hope of finding an investor or partner. On the contrary, this should be welcomed as a necessary and productive kind of engagement.  

If Iran’s private sector business leaders can consolidate their economic position on the back of foreign investment and trade, they will be able to take on a vital role as stewards of a nuclear deal.  

For the average Iranian, the nuclear deal has one fundamental promise: greater prosperity. The mechanism embraced by the United States and its allies of using sanctions as a coercive policy tool has had the effect of conditioning Iranians in an almost Pavlovian way— geopolitical strife begets economic pain. Consequently, the signal of political accord and the “relief” of sanctions seems to be triggering the expectation of the relief of this economic pain, and even that of economic reward. Indeed, as opinion polls suggest, President Rouhani’s legitimacy in the eyes of the Iranian public hinges on his rebuilding of the economy.  

But the rollback of sanctions will not bring about relief unless it translates directly into an increased flow of goods, services, and capital into Iran. Following the change in the Iran regulatory environment, only private sector companies will be able to establish the flows necessary for economic growth— whether to introduce vital pharmaceuticals, the latest fashions, or investment funds into the country.

Iran’s private sector is uniquely positioned to create value for Iran’s long-term development. Value creation, as a concept of management, entails the proper treatment of shareholders, employees, and customers as part of corporate social responsibility. When value creation is more than the policy of a single business, and instead reflects the ethos of a whole industry or economic sector, private enterprise can take on a true social significance.

In this sense, Iran’s private sector firms, if properly empowered, can serve as the anchor for Iranian civil society. Through a commitment to corporate citizenship, companies can become advocates for the citizenry within the context of Iranian political economy.

In the current situation, the Iranian state and private enterprise compete for access to limited resources and capital. Livelihoods are either tied to a state affiliate or to a private concern Knowing this, class and cultural divisions are exacerbated by economic antagonism. Issues of public health, environmental degradation, educational policy, and legal protection will not be effectively addressed.

The Islamic Republic’s support for privatization has been surprisingly persistent, if unfulfilled. The technocrats are well aware that state owned enterprises struggle to generate economic gains of real value.

The Rouhani administration is committed to privatization and to the success of the non-governmental sector in Iran. The aim is to give new actors a voice in the wider arena of public affairs.  

This commitment has been signaled since the early days of the administration's tenure, and in Rouhani's cabinet’s engagement of the current crop of Iran’s private sector business leaders. The logic is clear. The Iranian state ought to focus on security and governance, and rent seeking should be formalized through taxation. 

But in the history of modern Iran, and especially in the age of globalization, economic policy has never been a national prerogative.

The imposition of sanctions and their aftermath are testament to this fact. As key actors in Iran try to turn over a new leaf, it is up to the P5+1 to empower Iran’s private sector as interlocutors, stewards, and creators, and thereby ensure that policy treats such empowerment not as an afterthought, but as an intended effect of a nuclear deal. Sanctions relief ought not to be seen as merely the quid-pro-quo of any final nuclear agreement. It is truly the sine-qua-non of everything promised by the ongoing détente. 

Photo Credit: AP Photo/Michael Euler

The Greatest Asset: Funding the Future of Education in Iran

Iran's higher education sector is one of the country's greatest assets, with both women and men achieving degrees. Iran's Organization for Investment, Economic and Technical Assistance issued a report in 2013, highlighting the potential of the academic sector in Iran. It stated that in that year, the country had 4.5 million active university students studying at bachelor's, master's and doctoral levels.

Scimago, in an index of global academic prowess, ranked Iran 16th worldwide in 2015. Previous editions of the index also conjectured that by 2018, Iran could become the fourth largest contributor of academic publications in the world, and the country would notably rank first among Islamic nations.

It is therefore important to support these institutions so they can continue to thrive and grow. Prior to working in Iran, I spent a considerable time in the United Kingdom. As a student in the UK, I learned about the possibility university leaders have to take advantage of alternative investment streams to support academia. Now back in Iran, in my role at Hekmat University in the Holy City of Qom, I have come to recognize that standard channels of revenue, such as tuition, can only do so much to support the growth and development of higher academic institutions.

In my daily duties at Hekmat, I am responsible for the welfare and academic progress of students during their time with us. What is clear is that these students deserve as much time and attention as possible to help them reach their goals. But for a university to offer time and attention to its individual students and faculty, funding is necessary. Iranian institutions can do more to secure this funding in innovative ways, based on model examples from the practices of other countries. 

Investing in Learning Outcomes  

The academic community in Iran ought to begin intelligently seeking new sources of funding. There are a few ways this can be done.

First, universities can seek to commercialize innovations. Science and engineering departments in particular can conduct large research and development projects by working with major corporations. Ideally Iran's scientists and engineers should be given the opportunity to develop their scientific models with the added support of the private sector; I must add that this is an ideal way to validate if the new innovations are even commercially viable. Universities can add to their intellectual capital as research institutions through partnerships with private-sector businesses. 

Small-scale initiatives, such as startups, are also relevant. Iran’s buzzing startup scene should be considered by universities attempting to engage and support students post-graduation. Tehran University has created a successful model for such engagement through its partnership with Sarava Pars' Avatech Accelerator program.

The emphasis on developing universities as post-graduate research centers has been a focus of education policy in some countries, such as the UK, in recent years. During my stay in the UK, I noticed that the Tony Blair government was adamant about getting students in practical courses. And, beginning in 1998, the fruit of this investment helped the UK develop new industries. The value of the creative economy to Britain now stands at $120b annually. In contrast, the over-emphasis on exam performance above practical learning in Iran has weakened our overall ability to compete on an international level. 

Second, education should be made available to a wider range of learners who may not be able to be full tuition-paying students of the university, but who may find value in distance and online learning. Distance learning was first developed in Iran with the inception in 1987 of Payam-e-Noor University. The institution now has 487 branches around the country, with some in very remote areas. This system has helped bring many people to higher education.

Looking forward, with the advent of mobile media and applications, we as an academic community should push for more distance learning to be done online, and possibly adopting the increasingly popular model of massively open online courses (MOOCs). Mature students are also beginning to take up a larger proportion of our classes. This in itself is an impressive feat. In recent years we have noticed 40% growth of this student segment. We believe that this portion of students will ultimately put the knowledge they’ve gained into practice in a shorter period of time than younger graduates. Online education can help so-called life-long learners retain access to top education while still in their careers.  

Third, universities should begin capital campaigns to help drive the next phase of growth and development. Better campus life, including extra-curricular activities, would help improve the university experience for many undergraduates. But students often must live far from school, with a costly and inconvenient commute. If university administrators, with the help of private sector development firms, could offer quality undergraduate and post-graduate accommodation the overall campus life would improve, offering the chance for students to develop their skills further with such offerings as added classes and evening discussions, or simply time to enjoy and participate in extracurricular activities.

New campuses can also help with growth. Tehran University has made an effort, for a multitude of reasons, to shift many of their students out of Tehran to Pardis, 30 kilometers outside of the capital. This is an ideal way to create new growth for the university as many of the buildings and facilities on the older campuses are not set up to accommodate new kinds of university programs.  

Overall, we must use these three new channels of investment—research centers, online learning, and campus development—to feed funding back into the new undergraduate intake. By doing so, we can develop our student potential and encourage re-investment in the cohort, which follows after them, through the fruits of their innovation and hard work. 

Ultimately this is the way Iran’s academic institutions must go, but it will require a huge amount of reorganization and cooperation with companies and public agencies. The new revenue streams will ensure the tertiary education sector remains Iran’s great treasure for years to come. 

Photo: Wikicommons

Renewable Iran: Creating the Energy Network of the Future

The global energy industry continues to find greater value in efficiency and clean technology, with a rapidly growing reliance on renewable energy. For Iran and the Middle East however, oil and gas have hardly been challenged as the dominant industry forces. But now that Iran prepares to once again open doors to the international business community, we must ask if renewables can, or even should, play a greater role in the future of Iran’s energy sector.

So, what’s the problem?

Iran is the country with the world’s largest conventional gas reserves and is the world’s third largest producer of natural gas - behind the US and Russia. Given these abundant reserves and production, you have to question why has a country of Iran’s population been a consistent net importer of natural gas during the last decade. The answer is Iran has very high per capita consumption of gas and other fossil fuels, with much of it going into power generation. In 2014, Iran burned 50 billion cubic meters of gas for power generation: that is more than in the UK, Germany, Italy, and France combined. In fact, in 2013, Iran consumed more gas than China, and was the 8th biggest energy consumer in the world, despite being the 32nd largest economy (World Bank) and the 17th most populated country. 

Moreover, according to the International Energy Agency (IEA), Iran is among the top ten global emitters of CO2. Iran is the top emitter in the Middle East and accounts for almost a third of the region’s total carbon emissions. Fossil fuels account for almost 98% of Iran’s total primary energy consumption.

Of the 70 gigawatts (GW) of power generation capacity installed in the country, only around 11 GW are low carbon sources with most of that hydro (10 GW) while 1 GW is nuclear, and 0.1 GW is either solar or wind. The rest is largely old, inefficient, and polluting fossil fuel power plants burning either fuel oil or natural gas. According to Iran’s Ministry of Energy, over the past decade electricity demand has grown by almost 6% annually, and is expected to grow by at least 2% - 4% through the end of the decade. There are now more than 30 million grid connected clients in Iran, compared to less than 20 million only ten years ago. 

So, Iran faces the problem, how can it meet this rapidly growing electricity demand while reducing its consumption of gas and fuel oil to eliminate imports (and facilitate exports), reducing carbon emissions to more average global per capita levels, effectively addressing the challenging air quality issues, and still attracting foreign investment and new technology?

The Role of Renewables

The answer is likely to be found in a combination of a modernisation of its power generation capacity, greater energy efficiency, and much greater reliance on renewable forms of generation.

In terms of renewables, Iran is naturally blessed with very good solar and wind conditions. Iran receives around 300 days of sunshine each year, compared to less than 64 days in Germany, the world’s leader in solar power with almost 25% of the global solar power capacity. The Global Wind Energy Council stated that some of Iran’s mountainous areas in the west and northeast have unique wind corridors that have plenty of potential for renewable generation.

The Iranian government is starting to get that renewables should now be an important part of the country’s energy strategy. In early 2014, Iran’s Ministry of Energy unveiled its plans for adding some 5 GW of renewable power capacity, mostly wind, to the country’s power fleet by 2018. Since the beginning of 2014, construction for around 400 MW of renewable capacity has started, and contracts for more than 500 MW have been awarded. The Iranian government increased its budget for renewable energy by more than 400% last year to around $60 million; although still small, the growth is going in the right direction.

Iran has also adopted a number of new policies towards renewable expansion, using similar policies to many Western European countries and opening up the sector to foreign investors. The Ministry of Energy has set up the Renewable Energy Organization (SUNA) that will administer these policies that include a feed-in-tariff scheme, under which the Ministry of Energy will buy the power generated from renewable sources at set tariffs for a 20 year period. At the set energy tariffs, investors are expect to be able to recover a full return on their investment in around four years of operations. In addition, the Iranian government is committed to providing up to 50% of the cost of installing residential solar panels, and to installing solar panels in public buildings. 

Another spur to renewables growth comes from the calls to introduce a carbon emissions trading scheme. In February 2014, Iran announced that it is planning to introduce an emission trading scheme (ETS) that would cover its power sector. Although little information is available about the structure of the scheme, it is certain that such ETS's are designed to discourage the use of inefficient fossil fuel burning power plants. The emissions cap will eventually increase the power generation costs for inefficient power plants and will further support the growth of clean energy and renewables.

With all the challenges Iran is facing, renewable energy offers a unique sustainable solution for Iran to fundamentally overcome these issues, while providing significant investment opportunities for international investors, and also boosting the overall sustainability of economic growth. 

Photo Credit: Wikimedia

The Convoluted Role of Lending in Iran

Banks dominate Iran's financial system, largely because the stock market is small and underdeveloped. The only way firms can raise funding for new ventures is by borrowing from banks. This condition enslaves the businesses and the wider economy to lenders. Over reliance on loans has been exposed as sanctions and poor lending practices left banks crippled in recent years, exacerbating recessionary trends in the economy. 

The notion that banks were "too big to fail" came to haunt free market economies in the global recession of 2008. But in Iran, with its largely state backed economy, this notion gains an even more troubling dimension. With the absence of developed equity markets and with bond markets at embryonic stages, combined with high business risk, savers are left with only one logical option: deposits. Iran's capital markets only raised $8.85 billion in the 2014/15 fiscal year. That would stand at just nine percent of all the lending by banks during the same period.

The reliance on banks as the sole conduit for turning savings into business investments gives banks exaggerated influence. Thus, if a bank in financial distress is not properly isolated, the effects across the wider economy could be catastrophic. Understandably, officials have never tested these waters. "The central bank and the government feel obligated to support [the banking system], but if it wasn't for that support, many banks would be in trouble," said former Central Bank of Iran governor Mahmoud Bahmani, in a recent interview with Tejarat Farda magazine. 

But having a turgid function in the economy is not the only drawback of Iran's banking system. 

Iran's major lenders are state-owned and even many private lenders are part-owned by state affiliates through holding entities. As such, the government gets too much say in how the banks are run. 

Considering that Iran's technocrats are not shy about meddling in corporate affairs when expedient, little is left for the banks to decide in terms of strategy and policy. Recently, the CEO of Bank Melli (National Bank), Iran's largest lender, criticized parliament for interfering in Melli's governance and budget planning, citing it as the main reason for the company's poor performance. Furthermore, the Central Bank of Iran caped lending and borrowing rates, in an attempt to boost business lending, regardless of the fact that most banks are in desperate need of funds and low rates cannot attract depositors. Thus, Iranian lenders have become levers of state control, and states have a poor track record in running businesses.

Government intrusion in banking policy not only reduces their efficiency, but also endangers the entire financial system and with it the economy at large. "Compulsory facilities"– loans state-owned lenders were forced to pay at cheap rates to fund government initiated schemes– have piled up bank balance sheets with at least $938 trillion rials ($33.1 billion at official exchange rate) of bad debt. The number becomes staggering when you consider that clients borrowed 3.2 quadrillion rials ($95.2 billion at market exchange rate) from Iran's commercial lenders during 2014/15 fiscal year ending March 21, 2015.

State-owned banks had to provide "Compulsory facilities" at low interest rates, while paying upward of 22 percent on one-year deposits. To cover lost revenue, they raised lending rates and embarked on risky enterprises. Lax oversight by regulators, legal loopholes and corruption abetted the banks in this regard. Now, the government is trying to solve the mess it made, regrettably with the same method: heavy handed intervention.

Though financing is not the only reason behind meager business activity, it plays a prominent role. Until Iran's capital markets grow to an adequate size and take their place in the financing cycle, banks will continue to be the only plausible source of funding. 

Even with the lifting of sanctions in sight, foreign banks are reluctant to do business with Iran, and reintroduction of Iran's banks into the global arena will take years, largely due to the issues outlined here. 

Unsurprisingly, the solutions are challenging and time consuming. The state must change its culture of interference, and instead privilege measured regulation. Moreover, the central bank has to isolate itself from political matters and increase its supervision of the banking system. Bankruptcy laws must be revised and bank charters changed accordingly.

Photo Credit: Reuters

A Case for Public-Private Partnerships: Supporting Iran's Disabled

The situation currently afflicting many in Iran’s disabled community is difficult to say the least. A staggering 400,000 of these disabled individuals—primarily men— are veterans who fought against Iraq during the 1980’s.

These brave ex-servicemen do have support of government agencies like the Social Welfare Organization of Iran and the Iranian Red Crescent Society, along with other charitable and religious organizations. However as time moves on these men’s medical needs will inevitably increase with their age. It is time we rethink how healthcare and funding for these men is provided

Care for the disabled community has primarily been in the hands of the state from the outset the Islamic Revolution of 1979. This top down approach to care was a necessary structure during the first years after the war and while the country was rebuilding itself through the Rafsanjani presidency. However, in recent years the needs of these disabled people have increased considerably, thus putting a strain on the existing medical support structure.

Moreover, the situation in the wider community of those with limited physical ability continues to be burdened under the weight of claimants coming forward with long-term issues seeking adequate care and support over long periods of time.

The State Welfare Organization (SWO) the government body which provides welfare benefits to the veterans, defines disability through four types: physical, auditory, visual, and mental. On the outset, this breakdown seems rather elementary, however the organization role is all-encompassing. The role of the SWO has expanded so much over the years that they must now care for the recently disabled as well as the groups like the veterans. Their budget—like for any organization of its kind worldwide— is finite. To overcome challenges and provide the best care possible, the Iranian government and the SWO must now understand that help can be provided in partnership with the Iranian private sector and international specialists.

Through my company, KTMA, working with the help of occupational therapists in Europe, we have spent two years researching the needs of the physically disabled, while also considering the budgets of the funding authorities. One thing I have found in my time building our company is the lack of support for more than the basics. Yet it is understandable that budgets are limited, and clearly the government, which has helped so many people, needs help itself sometimes.

What Can Be Done

This is where a unique form of public-private partnerships (PPPs) comes in. KTMA has teamed up with both the Social Welfare Organization along with the Red Crescent Society to assess the needs of the disabled and to offer solutions with its growing catalogue of equipment. 

The Paralympic Committee of Iran is another worthwhile organization with which we have worked in partnership. They have been invaluable for their excellent understanding of the current needs of the physically disabled. As part of continuing efforts, they also introduced me to one paraplegic veteran whose 24-hour carer was his wife. He shared his story with me.

“Everywhere I go am I with my wife” the man said, adding "I really need more assistance in my daily activities and maybe my wife would like a day off, I hate to be a burden on her."

What surprised me most was that considering the man's severe disabilities, he was still able to get out and about. This is mainly due to the recent introduction of disability access DAF buses by the Tehran municipality. The rest of the help the family receives is either from charitable organizations or from religious groups who help with food and utility costs.

As these caring costs rise further, and Iran's revolutionary generation continue to age, there now is an opportunity for groups like my own, to help in the assistance of the disabled in Iran. However it will take a comprehensive action-plan and cooperation between the public and private sector.  

Ultimately this would require the government to overhaul how it distributes its funding for the disabled and those of limited ability. It has been proven time and again that the large state organizations lose effectiveness as they grow, it is just a consequence of the burdens placed upon them. There has been no systematic review of how funding is provided to the organizations and this in itself adds another layer of inefficiency to the system.

Another serious issue afflicting the disabled is the lack of employers willing to take them on. The government did however pass a bill in 2003 that urges large state companies and state bodies to make allowances for the disabled and to get at least a small proportion of them back in to work.

How PPPs Can Help the System

What can, or rather what must be done, is that governmental agencies should relinquish some of their overall responsibilities to third party agencies to carry out specific jobs based on deep expertise. By this method, the country's coffers remain intact and waste which would normally remain in the system would be reduced. The overall quality of care provided to disabled Iranians would also likely increase, as new therapies, equipment, and even personal development opportunities are made available. 

Through PPPs we can serve the needs of the disabled by empowering specialized companies to provide for each client’s specific needs.

Moreover, if partially disabled people were able to earn a living, their overall costs are reduced over a period of time. This is particularly advantageous as not only do the financial benefits mean less reliance on the state, but they also give the veterans and other disabled individuals a sense of self-worth, something that many of them have said to me would help their case.

Innovating PPPs to tackle welfare challenges is most achievable. It both helps the state and helps these men and women in many more ways. But the general hesitance of the state to deal with private organizations is holding back the quality of care and service otherwise available. Europe has shown the way in this regard and by learning from their experience we can help Iran’s veterans and disabled people by reorganizing the way these individuals are provided for from the point of first contact. 

Photo Credit:  Morteza Nikoubazl/Reuters

9 Must-Read Books For Doing Business in Iran

Getting ready for business in Iran won’t be as simple as picking up the latest business bestseller at an airport bookstore. There are essentially no quality English-language books specifically about doing business in Iran (perhaps a reflection of the country’s relative commercial isolation).

Emerging markets best practice suggests that to truly understand Iran’s market, a businesss leader will require fluency in matters of economy, politics, society, and culture. In these areas, the business journalism in the pages of Bloomberg Businessweek or The Economist lacks depth, and the off-the-shelf market research reports of firms like BMI and Euromonitor lack context.

Fortunately, economists, political scientists and other academics have studied Iran with great diligence. Although their books and writings are not specific to commercial considerations, they nonetheless contain important lessons and insights for any business leader devising an Iran strategy.  

Below is a list of nine books that every businessperson should read before pursuing business in Iran.

1. A History of Modern Iran, Ervand Abrahamian, Cambridge University Press, 2008

Abrahamian’s relatively short and accessible text is a staple of undergraduate courses that deal with Iranian history or political science. His book gives a well-researched and balanced introduction to the last century of Iranian history. Anyone seeking to invest or work in Iran ought to consider a basic grasp of the country’s history as a prerequisite. Most analysis on Iran tends to fixate on the 1979 Islamic Revolution as the key historical event that explains Iran’s current position. But as Abrahamian’s astute history shows, 1979 was merely the culmination of several political, economic, and social trends. And by the same token, the present situation in Iran has to be understood within the bounds of decades-long trajectories which are helpfully introduced in this book.

2. Iran and the Global Economy: Petro Populism, Islam and Economic Sanctions, Eds. Parvin Alizadeh and Hassan Hakimian, Routledge, 2014

An understanding of Iran’s economy will be vital for all businesspeople seeking to engage opportunities in the country. Economists tend to publish findings in papers, making it difficult for non-academics to identify the key articles with the most valuable insights. Thankfully, UK-based economists Alizadeh and Hakimian edited this volume of essays covering various aspects of Iran’s economy. Published in 2014, the collected essays include a nod to future international engagement for Iran’s economy.  Subsequent work by these economists and their peers will have expanded on these issues in light of recent developments, but this collection offers a compelling primer into some key matters such as banking regulation, privatization, oil revenues, and industrial capacity.

3.  Iran's Struggle for Economic Independence: Reform and Counter-Reform in the Post-Revolutionary Era, Evaleila Pesaran, Routledge, 2013

Though it predates the election of President Hassan Rouhani, whom many see as a strong advocate for further liberalization of the economy, Pesaran’s book is a compelling introduction into the high-stakes debate that has developed in Iran about economic reforms. Her analysis explores how, in Iran, the simple idea of foreign direct investment (FDI) is tied to all sorts of historical and political contingencies. For business leaders seeking to pursue FDI in Iran, this book will help put their intentions in context.

4.  Business Politics in the Middle East, Eds. Steffan Hertog, Giacomo Luciani, and Marc Valeri, Hurst, 2013

It will be important for business leaders devising strategy for Iran to understand broader regional trends. The economic relationships between Iran and its neighbors are complex, and understanding trends across the region should influence how companies handle risk as it pertains to Iran. This would be one reason to read Business Politics in the Middle East. But in particular, the book includes an essay by Kevan Harris, who is perhaps the most exciting thinker on Iranian political economy today. Though he has yet to write a book on the topic, Harris’ many articles explore the role of the state in Iranian economy, and the capacity for Iran’s current economic and political systems to accommodate the kind of capitalistic activities that multinational corporations and foreign investors are mulling. His use of data from the Tehran Stock Exchange to more accurately define the governance and ownership of Iran’s largest corporations reveals the complexity of determining what constitutes a state owned enterprise (SOE) in Iran. This kind of data will be fundamental to properly accounting for legal, political, and economic risk when it comes to investment and partnership targeting in Iran.

5. Bazaar and State in Iran, Arang Keshavaziran, Cambridge University Press, 2009

Keshavarzian is a sociologist by training and his book is very much academic in purpose and tone. It is a rare example of a book on modern Iran with a singular focus—in this case the seemingly timeless institution of the bazaar. As Keshavarzian’s book explains, the bazaar is no longer as powerful as it once was. But at its height Iran’s merchant class, the bazaaris, epitomized the constructive role that commercial enterprise can play in Iranian society. Business leaders today could learn from the example of collaboration, network-building, and civil society engagement that the bazaar offers. Indeed, the financial might of the bazaar was bolstered by its particular commitment to its stakeholders—owners, employees, and customers. Iranian industries, and their international partners, will find the greatest success if they take a similar approach, one devoted to value creation over profit hunting.

6. Iran's Natural Gas Industry in the Post-Revolutionary Period: Optimism, Skepticism, and Potential, Elham Hassanzadeh, Oxford University Press, 2014

The natural gas industry will no doubt be a major target for investment and development in a post-sanctions environment. But that is not the reason that Hassanzadeh’s book is worth mentioning. Her book is a model example of a deep, interdisciplinary study of a major industry in Iran. The way she weaves political and economic history into the technical discussion of the gas industry and its development prospects should be emulated. For a businessperson trying to develop an understanding of what good market intelligence and contextual knowledge looks like, Hassazadeh provides one of the best examples. Indeed, her “unique methodological approach, presenting a multidisciplinary study of the various historical, political, and economic variables” was a deliberate innovation in the work.

7. Negotiating With Iran, John Limbert, United States Institute of Peace Press, 2009

John Limbert is famous for being one of the hostages taken in the storming of the American Embassy in Tehran in 1979. Despite that unfortunate experience—or perhaps because of it—he has followed his long diplomatic career with a turn as an academic focusing on Iran. These days, the best advice holds that emerging market strategy must take into account cultural awareness to complement market intelligence. Knowing how to operate in a market necessarily requires knowledge about how to deal with local actors. Limbert makes the argument for cultural awareness with a particular focus on the progress of US-Iran political relations, but many of his insights also have a relevance to the realization of commercial relations between Iranian and Western firms. In particular, Limbert outlines “Fourteen Steps to Success” for negotiating with Iranians, many of which are superb advice for business negotiations. Steps such as “talking to the right people” and “choosing intermediaries with care” should not be taken lightly. One might worry that Limbert, as an American, would be poorly positioned to comment on Iranian culture. But having lived and taught in Iran for many years prior to the 1979 revolution, leaving him with excellent Persian language skills, Limbert is an excellent guide to these questions for a foreign audience.

8. Going to Tehran: Why America Must Accept the Islamic Republic, Hillary Mann Leverett and Flynt Leverett, Picador, 2014

The Leveretts, a husband and wife team with experience as national security analysts in the Bush and Clinton administrations, offer suggestions for moving beyond the thirty years of distrust between the United States and Iran. They argue that negotiation between the West and Iran is the only way to address longstanding political and security concerns. In exploring this topic, the book becomes particularly useful for understanding many of the contemporary dynamics within Iran’s political arena today, and by extension wider society itself. Although not directly concerned with business, the book aims to make the reader understand the society of contemporary Iran through an analytical-political lens. Similarly to Limbert’s book, Going to Tehran also aims to give the reader a glimpse of how the “Iranian”—in this case the political actor— sees himself in the wider global and regional context. Many of the issues afflicting Iran’s relationships with an array of countries can be neatly summed up in the writings of the Leverett duo. 

9. The Strangling of Persia, Morgan Shuster, Mage, 2006

Morgan Shuster was an American banker who was invited to Iran in 1911 to serve as Treasurer-General and to put the finances of the newly formed Persian constitutional monarchy in order. His efforts were stymied, however, by the competition between the British and Russian Empires, which had split Iran into two spheres of influence in a 1907 convention, only to continue meddling in domestic politics as they competed for power. Shuster’s sympathy was with the Iranian people, who were trying to establish democratic institutions with little success. Ousted from Tehran by the Russians, Shuster wrote his book to expose how the British and Russians continually denied the Iranian right to self-determination.  From Shuster’s time until today, Iranians have remained sensitive to the notion that true national independence has been denied by great power politics. The recent experience of sanctions has only heightened this sentiment. As foreign firms seek to enter Iran, it would behoove business leaders to develop an awareness of this perception as many of Shuster’s observations continue to ring true today.

Photo Credit: iStock

The Business of Political Economy: Moving from Bazaar to Bourse

Originally published on Lobelog.com

Anticipation has been building among international investors and business leaders as Iran and the P5+1 edge closer to a nuclear deal. Each week another trade delegation— whether American, or Swiss, or German—makes its way to Tehran to scope out opportunities.

I have argued before that Iran’s private sector business leaders need to play a bigger role in the country’s reengagement of the international community. Indeed, a prospective détente is dependent not only on the normalization of political ties between Iran and the West, but also on the realignment of economic ties. In this sense, détente is a question of both politics and economics. It is a matter of political economy.

In order to envision the future role of Iran’s private sector, it helps to look to the past and the historical role of the bazaar, once the center of Iranian political economy.

The Centrality of the Bazaar

We commonly think of the bazaar as a pre-modern marketplace of dark and winding corridors, full of carpets and other exotica. But the bazaar was in fact the economic heart of Iran until the end of the 20th century. It was even more important perhaps than the country’s oil refineries. In the 1970s, the economic might of the bazaar was so significant that the marketplace controlled “as much as half of the country’s handicraft production, two-thirds of its retail trade, and three-quarters of its wholesale trade.” Beyond trade, the bazaar was also a vitally important creditor. As late as the 1960s, “the bazaars in Iran were estimated to loan as much as all the commercial banks put together.” And even after a decade of expansion of modern banks, “in 1975 the bazaar was estimated to control 20 percent of the official market volume, or 3 billion in foreign exchange and 2.1 billion in loans outstanding.”

In this way, the merchants of the bazaar, known as bazaaris, constituted a powerful network of economic actors. Acting as a social class unto themselves, the bazaaris anchored Iranian civil society, granting immense political power to the Iranian people by supporting mass mobilizations such as the 1905 Constitutional Revolution and the 1953 movement to nationalize the Iranian oil industry. 

In 1979, decades of political turmoil culminated in the Islamic Revolution, in which a broad coalition of Islamic and leftist political movements collaborated to oust the Shah. In the years leading up to the revolution, the bazaaris had played a critical role.

The Shah, with his drive for modernization, despised the bazaaris, whom he considered remnants of Iran’s backwards past, ridiculing them for their “worm-ridden shops.” Annoyed by the domination of the bazaar in the retail and banking sectors, the Shah sought to render them obsolete, writing in his memoirs: “’I could not stop building supermarkets. I wanted a modern country.”

The bazaaris felt threatened by the trajectory of economic planning and saw its shortcomings. Sitting within an institution visited by both the lower and upper classes, the bazaaris understood the consequences of growing inequality all too well.

The bazaars’ broad support of the Islamic Revolution, and Ayatollah Ruhollah Khomeini in particular, made all the difference for the durability of the revolutionary movement. In numerous instances, bazaaris across the country mobilized funds and people to ensure that different groups could sustain their protests. In 1977, for instance, bazaaris stepped in to cover professor salaries at Aryamehr University so that protestors could endure a suspension of pay.

Ultimately, the revolution succeeded in establishing the Islamic Republic, with Khomeini as its Supreme Leader. When Khomeini began consolidating power, he quickly sought to neutralize the bazaar, worried that a deteriorating economy would pit the bazaaris against his nascent rule. The new regime rewarded the members of the Islamic Coalition Association (ICA), a small segment of bazaaris, who had “financed and organized many political rallies and events” by making them “part of the new ruling elite.”

By cleverly creating ties of allegiance between the bazaar and the new government, Khomeini sought to eliminate the bazaar as a site for independent political contention. It was no longer an institution of the private sector. Indeed, even today, those bazaaris with ties to the political establishment are referred to as dawlati, meaning “of the government.”

Decline of the Bazaar

Since 1979, weakened by the policies of the Islamic Republic, the bazaar has ceased to be the locus of power in Iran’s political economy. Consider that in the 2009 so-called Green Movement, the bazaar played hardly any role, despite dissatisfaction with the government among many merchants. This was the first time in over a century that the bazaar was not active in a mass mobilization.  

Because of the bazaar’s decline in the years following the revolution, and because of the simplistic portrait of Iranian political economy as that of a rentier state defined by oil, scholars and analysts alike have largely ignored the critical role of the bazaar. Only a few works, such as Arang Keshavarzian’s excellent Bazaar and State in Iran and recent scholarship by Kevan Harris, give the institution its due attention.

With the help of this scholarship, it is possible to identify a few key qualities of the bazaar and its merchants. First of all, the bazaaris were private actors, but with strong communal ties and a sense of civic  and religious responsibility. Their political leanings were moderated because their fortunes were tied to the economic wellbeing of the wider Iranian public. And they were willing to mobilize resources to support political actors whom they felt represented the interests of the common man.

The emergence of institutional actors with these three qualities could have a profound impact on Iran in a post-sanctions environment and on the road to political reform. Unfortunately, since the weakening of the bazaar, such qualities have been largely absent in any institution of Iranian civil or commercial life. In the current environment, those commercial entities with the means to mobilize resources in politics are neither private, nor sufficiently moderate, nor beholden to a sense of civic duty. They are usually part of the country’s military-industrial complex, serving first-and-foremost their dawlati members.

Therefore, if Iranian political economy is going to once again find its fundamental institution, one that can empower civil society and bolster the middle class, new stakeholders need to step up. 

Iran’s Future Political Economy

The most likely candidates are the firms of Iranian private enterprise, especially those that are publically traded and are therefore committed to a wide range of shareholders in addition to their employees and customers. Every member of civil society takes on economic roles as a customer, employee, or shareholder. If these stakeholders can be economically engaged, then Iranian civil society can once again find its capacity to mobilize and make political claims bolstered by economic clout.

In this sense, the future of Iranian political economy requires that the companies of the bourse, Iran’s stock exchange, serve the role once played by the merchants of the bazaar. We might call this the bazaar-to-bourse theory.

This is not to say that business leaders should get involved in politics directly. But when companies seek to provide goods, services, and employment within an economy, they begin to constitute what Keshavarzian calls “socially embedded networks,” which give economic systems political meaning through the everyday transactions of people. If these transactions can occur outside state-controlled channels, the Iranian people will have a better chance of holding their government accountable to promises of reform. Encouragingly, the current Iranian President Hassan Rouhani supports such a rebalancing of Iran’s political economy.

But private businesses have a long way to go. Misguided sanctions have significantly weakened their position in the economy. Shayerah Illias, a researcher at the Congressional Research Service, has noted how sanctions have only contributed to the marginalization of private enterprise begun under Khomeini, awarding more control to state-owned companies and their affiliates. Squeezed by inflation, unemployment, and without an economic anchor in the form of private businesses, Iranian civil society has suffered the most under sanctions.  

It follows that, if the United States and the rest of the P5+1 are really committed to a durable political agreement, they ought to properly plan for a realignment of political economy in a post-sanctions environment. Pragmatically speaking, foreign investment cannot be an afterthought of a nuclear deal. Clear and consistent sanctions relief needs to be guaranteed early so that Iran’s private sector can get to work fast. Securing investment and boosting trade will help put businesses in a position to empower their customers, employees, and shareholders. We would expect a reduction in unemployment, lower inflation, greater purchasing power, and altogether more influence for the average Iranian in the composition of the country’s political economy.   

On this basis, Iran’s private sector business leaders must aspire not only to the power and influence of the historical bazaar, but also to its sense of community and common purpose. In the bazaar, the “steady accretion of interactions blurred the divide between potentially distinct spheres of life—kinship, friendship, partnership, and commerce.”

When we think about business leaders, it is easy to dismiss them as out-of-touch “fat cats” and to expect little from a capitalist institution like a stock market. But Iran’s business leaders, like the bazaari merchants before them, have the ability to facilitate constructive social change. And Iran is one of the few countries where ideologies of politics and economics find truly syncretic forms.

So far, the signs are encouraging that the men and women of Iran’s private sector are the kind of global leaders we would want to see empowered. To leave them out of the picture of détente would be a mistake. It would also expose an all-too-typical lack of historical awareness on the part of Western policymakers.

“Corporate citizenship” can be more than a buzzword if it is woven it into the fabric of Iranian business culture. The bazaar provides the model to emulate.

Photo Credit: NPR Media

The New "Normal": Why the World's Banks Need to Rethink Iran

On Monday April 27th, legal proceedings began at Manchester Civil Justice Centre in the United Kingdom. Blackstone Solicitors, a small legal practice led by Emma Nawaz was challenging the banking behemoth Royal Bank of Scotland (RBS) in court. On behalf of her clients, Nawaz is claiming that RBS discriminated against people of Iranian heritage, whose bank accounts were closed in 2013.  The legal action was first filed in the same year, buthas taken nearly two years go to court. The case is expected to last 5 days.

The legal action is the latest in string of legal actions by Iranian individuals and companies, battling against the interference of sanctions. Normal citizens have been pit against a major financial firm, in a David versus Goliath scenario.  

As reported in the international press in 2013, and most recently in the Financial Tribune, the claimants allege that RBS breached Britain's much-vaunted Equality Act of 2010 in the course of closing accounts belonging to entire families. One of the claimants was a nine-year-old girl.

Emma Nawaz, the solicitor dealing with the case said, “The decision by RBS to close the bank accounts of customers connected to Iran is shocking and goes far beyond any reasonable interpretation of the sanctions rules."

She added that, “These are ordinary people who contribute to society and have become victims of racism by a high street bank simply for wanting to have a current account”.

In response, RBS' spokesperson said that they were required to comply with their legal and regulatory obligations and were unable to comment particular cases of individuals."

One might wonder why a bank such as RBS would even bother closing the accounts of these Iranians, most of whom were UK citizens with no commercial ties to Iran. What could the aforementioned “regulatory obligations” entail?

It is worth noting that in 2013, the same year when the Nawaz’ clients had there accounts closed, RBS was fined USD $100 million by American authorities for breaching sanctions on Iran, Burma, and Cuba among other countries.

Similar fines have been levied on banks such as HSBC ($1.9 billion in 2012) and Lloyds ($350 million in 2009). Both HSBC and Lloyds have similarly closed down the accounts of individuals with Iranian heritage.

And it is not just in the UK that Iranians have had bank accounts closed. Similar actions have been taken in Canada—where Iranian university student Arash Khodadadi had his account closed by CIBC—and also in the United Arab Emirates, where blanket policies affected the many Iranians who maintain accounts in Dubai.

Looking to these facts, a pattern emerges. Banks have been regularly curtailing the activities of everyday Iranians, even in the absence of definable regulatory issues. It has simply been easier for banks to close accounts than to prove to authorities that they are not in breach of sanctions.

While account closure policies have harmed Iranians outside of Iran, the risk aversion of banks has also caused harm to Iranians within Iran. Notably, banks remain reluctant to handle funds even for projects that are permissible under specific or general licenses. For example, the volume of humanitarian trade between the West and Iran is lower than would be expected because of a lack of “comfort” among banks about trade with Iran, even trade that is clearly legal.  

The implication is troubling. We would hope that the discrimination against Iranian clients should be coming to an end considering that the recent JCPOA agreement between Iran and the P5+1 world powers indicates an improving political climate. However the legacy of risk aversion may linger on for years to come, with a punitive impact on everyday Iranians.

The question is how banks will weigh the rewards and risks of engaging Iran as it approaches a “post-sanctions” era.  They will surely remain vigilant when it comes to rule breakers as sanctions are partially lifted. Yet at the same time, financial firms will surely be setting up small exploratory operations, “Iran Desks” to explore the possibilities of entering the Iranian market once again. 

If the nuclear deal does go-ahead by the June deadline, then Iran could expect an initial interest by a number of global banks and financial institutions. Firstly, given the risk aversion outlined above, it is highly unlikely that banks such as HSBC, RBS, Credit Suisse or any other of the major European or American players would enter the Iranian banking sector immediately after any agreement. At best, these banks may engage in humanitarian trade finance, but only if there is a high degree of confidence that they will not be stung by further fines.

To understand what might unfold in Iran, it is worth considering what has transpired in other “frontier markets.” Myanmar, with about one-fifth the gross domestic product of Iran, is the most recent example of what a post-sanctions environment is like.

Myanmar began its détente with the US in earnest in 2011. The easing of financial sanctions followed in 2013. This set the stage for foreign banks to increase their in-country activities. In October of 2014, three Japanese banks— Bank of Tokyo-Mitsubishi UFJ (BTMU), Sumitomo Mitsui Banking Corp and Mizuho Bank— were the first top-tier financial institutions to earn operating licenses for Myanmar. A further 6 banks from the Asia Pacific region won licenses, but none as large as the Japanese brand-name firms.

In April of this year, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation two banks that have been fined over sanctions breaches before, opened the first foreign bank branches in Myanmar.

These two banks are also notable in the case of Iran, which does significant oil trade with Japan and has continued to do so under the 2013 JPOA framework. This trade amounted to 172,154 barrels-per-day in 2014, with imports rising by 25% in the early months of 2015. Iran accepts payment for this oil in its accounts at Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation while also maintaining a sovereign account at Bank of Japan.

These two Japanese banks therefore represent financial institutions that have been stung by fines for sanctions non-compliance, and yet have been bold enough to enter into a post-sanctions market within the first 1-2 years of its opening. Importantly, these are also banks with significant exposure to the Iranian economy. American and European banks have not exhibited the same gusto for post-sanctions markets, nor do they have such a fundamental connection to Iran trade. Therefore, we might expect Japanese banks to lead the charge.

What is encouraging is that the Japanese financial sector is highly developed and well regulated, with standards in line with global best practices. If Japanese banks lead the way, they could offer the proof-of-concept for similarly operating American and European banks to follow into Iran.

Furthermore, Iran is unlike Myanmar in one key way. It has its own domestic financial industry, with significant regulations and a wide range of institutions.

The country currently boasts thousands of branches, ATM and EPOS systems based on an clearance and automated payment system called Shetab, and consumer tools like online banking. The public and private banking industry is currently going through a shakeup courtesy of the Central Bank of Iran in order to prepare for possible foreign competition.

There is no easy way to predict how an “end of sanctions” scenario will play out, but considering the extent of Iran’s banking industry development and the attractiveness of the market, the potential rewards are clear. But as the RBS episode shows, banks will need to fundamentally “rethink” Iran itself.  Hopefully somewhere in that process, everyday Iranians will start to find the world’s banks welcoming them once again. 

Photo Credit: Vahid Salemi, AP

Hello My Name is Iran: Conferences and Strategic Communications

Over the past 18 months, I have become convinced that Iran’s commercial opening represents the world’s greatest strategic communications challenge. Both the general public and the business community worldwide continue to understand Iran through a handful of channels (news media, Hollywood movies, political spin) and a handful of stereotypes (rogue state, oil rich, untrustworthy).

As has been discussed in previous articles on this site, if Iran is going to achieve an economic and commercial reawakening, it will need to open new channels of communication, challenge stereotypes, and actively create a narrative of progress and prosperity.

Having outlined the problem, it is important to identify solutions. When we consider Iran’s strategic communications problems, which exist not only at the country level, but also at the level of companies and individual business leaders, conferences can play an absolutely critical role.

Over the past year, several initiatives have established the proof-of-concept for conferences as part of the solution to Iran’s strategic communications challenges. 

In the exciting area of technology and startups, the iBRIDGES conferences series has brought a community-led effort to empower promising young tech entrepreneurs in Iran, tapping into the energy and excitement of Silicon Valley in an Iranian context. (Discolure: I am on the Europe Advisory Board of the iBRIDGE Berlin conference). 

Recently, the TEDxKish conference leveraged an intelligent choice of location to create something remarkable: an Iranian conference, located in Iran, with strong international participation and a great deal of engagement across online platforms.

My own work has focused on the Europe-Iran Forum business conferences series. The first Forum was successfully held in London in October 2014 and the second Forum will be held in Geneva, Switzerland in September 2015. These conferences seek to connect business leaders from Europe, Iran, and worldwide to develop networks and knowhow for post-sanctions commercial engagement in open, technical, and energizing discussions.

Importantly, these three conference efforts are initiatives of the private sector, and represent collaborative efforts between Iranians from both within Iran and among the diaspora, as well as their partners from around the world. The private sector and international qualities of these projects are key aspects of their success. Such conferences can be politically neutral and smartly curated for the needs of the global audience at hand.

Certainly, there are other examples of how conferences can ameliorate the circumstances around Iran’s position in global networks of people and ideas. Within academia, the biennial conference of the International Society for Iranian Studies is particularly notable. There are also those circumstances in which Iranian actors contribute positively to non-Iran focused conferences. It bears mentioning that the introduction of the Rouhani administration to the global economic elite occurred at the World Economic Forum in Davos in January 2014. The positive impression made by President Rouhani, Foreign Minister Zarif, and the Iranian delegation at Davos bolstered the new narrative of Iran’s re-opening, a narrative to which iBRIDGES, the Europe-Iran Forum, and TEDxKish later made humble contributions.

For many in the world of business, the notion of the “conference” evokes a drab affair of business card swapping in a hotel ballroom. At this superficial level, conferences merely offer their participants—the speakers, sponsors, and delegates—the opportunity to network and build an awareness of the activities of potential partners and competitors. Sometimes, a particularly good conference program might also offer learning experiences, as experts share their insights in well-curated panels or workshops.

If we consider the largest companies—major energy firms, banks, industrial conglomerates—the benefits they accrue in speaking and attending conferences may seem limited. They almost certainly know the key players in their sector, potential partners already know them, and they have industry expertise beyond anything that can be gleaned at a conference. 

So why do major firms bother with conferences? They participate in business conferences in order to achieve communications and marketing goals. Conferences allow companies and their executives to build brand awareness and demonstrate thought leadership. When a firm such as ExxonMobil or Volkswagen sponsors a conference, they do so because it is expected of them as the market leader. Such visibility cements their supremacy in the market. 

But when we look to an Iran-focused conference, the dynamic is quite different. The circumstances of sanctions, and the stigmatization of Iran as a political pariah mean that Iran-focused conferences must operate by fundamentally different rules. Communications and marketing are not just things that happen at an Iran-focused conference, they represent the very strategic purpose of a conference at this juncture in time.  

There are two interrelated ways in which conferences enable the kind of strategic communications that will be vital to unlocking Iran’s economic and commercial potential. First, the communications dimension of conferences matters hugely for a country and marketplace hampered by negative perceptions. Conferences allow the creation of new and constructive narratives. Second, conferences allow relationship building that is transparent and accountable, and enables Iran to become part of global networks. Taken together, these outcomes allow for a simple conference to have a profound impact on the way Iran's commercial future is to be understood and realized. 

The first type of strategic communication enabled by conferences centers on the creation of narratives. A narrative is a way of understanding complex circumstances; it is a story we use to understand a part of the world. It has been many years since Iranians have been able to write their own story, and this is especially true for those within the business community. While academic and cultural events have allowed for an authentic scholarly or artistic narrative of Iran to persist under sanctions, the commercial narratives have been stiffled.

Necessarily, the limitation on commercial activity and the inward focus on most Iranian firms has prevented businesses from generating a constructive narrative around their activities. Today, this is changing. Iranian companies are increasingly outwardly focused as they seek foreign partners and investors. The story of Iranian innovation, compounding an untapped potential, now dominates business reporting about Iran. But while journalists and market analysts are important interlocutors for the narrative of Iran’s commercial opening, it is also important for business leaders to speak for themselves. This is why conferences are so important. The participation of senior executives allows for companies to send signals about their intentions for the future and tell a new story about how their particular firm is going to contribute to the larger narrative of Iran’s commercial reawakening. 

Second, once the narrative is in play, conferences allow the formation of new and stronger networks between Iranian firms and their international counterparts. As mentioned above, many large companies already have access to the Iranian market through local partners. But the economic potential of these partnerships is stymied because of sanctions, and because of the stigma associated with Iran operations. Take for example Carrefour and the wildly successful Hyperstar chain it established in Iran in partnership with the Dubai-based Majjid Al Futtaim (MAF) retail conglomerate. In the press, Carrefour insists it has "no links" with the Hyperstar project despite common knowledge of their role.  

For Carrefour and other companies, the inability to integrate Iran operations into global networks is challenging on numerous levels. As described above, it impacts the creation of narratives, as companies cannot discuss Iran success stories openly. Second, it means that Iran operations are segregated in specific partnerships and often subject to their own supply chains. Iran should be the regional hub for manufacturing and trade, yet across industries it exists as a kind of market unto itself. Certainly, there are structural reasons for this isolation. But it is significant that Iran is also isolated in the communications and self-presentation of companies. Germany's Rocket Internet, a start-up incubator valued at €8 billion Euros, operates in Iran under a holding group known locally as Romak. The company's aggressive expansion in Iran has been widely reported, yet Rocket makes no mention of Iran as a region of operation anywhere in its official marketing materials or on its website. 

In this sense, even if major companies are present in Iran already, they will need to further develop their Iran operations with an eye towards integration into regional and global strategy. Conferences, in which Iran country-managers and their teams can introduce themselves as the empowered representatives of major multinational corporations, offer one way to begin this process of integration. In these venues, networking takes on a new dimension because the network is being introduced in an open, transparent way. It is especially important for Iranians to build relationships with global players while outside of Iran. There has been a great deal of reporting about Europeans and Americans visiting Iran to explore opportunities, but Iranian firms ought to signal their serious intentions by mobilizing resources to reach audiences in Europe and the US. In some sense, it may be the companies and investors that are not yet to take fact-finding trips to Iran who will make the best partners for new growth. In these situations, conferences will be the critical venue for brokering relationships. 

There will come a day when Iran-focused conferences will be many. They will include routine investor tradeshows, real estate showcases, and tourism expos. These conferences will be organized by event management companies that know little about Iran, but a lot about logistics and marketing as they hold similar conferences about Turkey and Dubai and Brazil.  

When this day comes we will know that Iran’s role in the global economy will have become clear, the idea of doing business in Iran will have become normalized, and simple marketing will be the main impetus for participating in routine events.   

But for now, Iran-focused conferences remain critical for strategic communications. Companies and individuals ought to support these efforts by attending, speaking at, and sponsoring conferences with a clear understanding of the strategy involved. Each time such a conference is successfully held, whether focused on investment, on entrepreneurship, or simply powerful ideas, Iran inches closer to achieving its potential. 

Photo Credit: Bourse & Bazaar

Crisis in HR: Management and the Iranian Labor Market

Iran may be on the cusp of a landmark nuclear deal. For the country's workforce, new employment opportunities and a revitalized labor market may be just over the horizon. Foreign companies seeking to enter Iran will likely poach some of the best talent to run country operations. With this increased competition, how will Iran's corporate sector hold on to their best and brightest?

US-led sanctions and economic mismanagement have depressed the wider Iranian economic and the labor market in particular. Iran’s population is still young compared with European countries, and it is young people who have been disproportionately affected in their employment prospects and earnings.

Economists in Iran and abroad have identified a condition sometimes called “waithood.” Between 1984 and 2007, the unemployment rate for young men rose from 13.7% to 19.2%—economic growth could not keep up with population growth. Among women unemployment rose from 19.9 percent to 37.9 percent, reflecting how the economic slowdown in Iran has disproportionately affected women, who rely on job creation in the service industry.  The World Bank estimates that the current unemployment hovers around 20%, though official sources claim a rate closer to 10%. Overall, those under the age of thirty represent nearly 70% of the long term unemployed in Iran.

Additionally, unemployment figures hide another concern for young Iranians. Even those young people who do find employment often have to contend with job insecurity or part time work.  Labor laws were written in decades past and lean towards older workers, thus making layoffs and terminations very costly for firms.

Many companies avoid these costs by offering temporary contracts to younger workers that are not subject to these laws. In effect, many young people employed in Iran can’t plan for their economic futures for much more than a year at a time. Consistently being bounced around companies and sectors, Iranian youth aren’t able to easily kick start a career and as a result they find themselves waiting for new opportunities to emerge.

But this is not to say that Iranian youth have been passive in the face of these pressures. In an attempt to breakout of “waithood”, Iranian youth have sought to increase their levels of educational attainment. A typical response to diminished employment prospects, greater levels of educational attainment not only provides the individual additional time to seek out suitable opportunities, but is also meant to improve employability.

In 2010, the number of Iranian youth sitting the post-graduate national exam was twice the number who had done so just five years earlier. However, this increase is so great that the number of students seeking graduate degrees will soon equal those seeking undergraduate degrees. With an increasing supply of highly educated workers, there is a glut in the labor market, meaning that even a graduate degree might not be enough to break out of waithood. This dynamic helps explain to important phenomenon seen on the part of young Iranians: a growing propensity to seek education and employment abroad, and a rise in entrepreneurial pursuits, exemplified in the much vaunted Iranian online business community.

But emigration and start-ups will never be available to enough young Iranians, who need outlets to not only secure their own futures, but also to contribute to the Iranian economy through their productivity and acumen.

As such, the deficiencies in the Iranian labor market offer an immense opportunity for foreign firms seeking to enter the country. Unlike most emerging economies, Iran has a highly skilled workforce, and foreign firms can expect to find capable managers in Iran itself—improving the likelihood that firms will find the right formula for success in a shorter period of time.

For Iranian companies, increased competition in the labor market, especially from foreign firms, will result in difficult circumstances. Employees with key skills are going to be a highly sought after commodity and the prospect headhunters poaching a company’s top marketing person is a very real possibility.

Naturally, Iranian firms are going to have to take the bull by the horns in order to keep their workers committed. But this will require more favorable contract terms and higher salaries. It is unclear if some Iranian managers will be able to stomach the higher expenditure on salaries. 

It is hard to measure the extent of Iranian unpreparedness, but by way of comparison a 2013 report in Entrepreneur magazine found that more than 50% of American employers polled had no formal strategy if there was a sudden walkout or loss of key staff. The figure in Iran is likely as high.

Anecdotally, conversations with Iranian CEOs reveal a worrying bias on the part of Iranian managers. They may recognize that their companies have significant problems when it comes to staff retention. Some senior managers attribute retention problems to the "fickle career attitudes" and "transient lifestyles" of Iran’s youth. Managers tend to reward those employees who seem “responsible.” In other words, promotion in professional life goes hand in hand with particular lifestyle choices like marriage and having children.  Ironically, one of the key social consequences of waithood is that Iranians are getting married at older ages and many are opting to have one child or none. Without rewarding jobs, young people lack the financial means to move out of their family homes and achieve financial and social independence.

Yet it isn’t just salaries that account for employee satisfaction. Research conducted in Canada shows that salary increases only offers short-term gains on staff retention. Instead, Iranian managers need to provide a fully optimized working environment, where work is rewarding, the opportunities for advancement are clear, and the company provides important benefits like medical insurance, ample holidays, and retirement contributions.

Some in the local private sector do have good employee practices, offering similar contracts to those in the West, however it appears in some instances even they struggle to hold on to some of their vital employees.  

Certainly, Iranian managers are unlikely to pamper employees with new contracts. And foreign firms will not enter the Iranian market offering the same salaries or benefits as offered in western economies. After all, lower labor costs will remain one of the main attractions of the Iranian market, especially in services and high-tech manufacturing where Iran’s skilled labor pool can match or surpass international standards.

Nonetheless, in a post-sanctions environment, a new set of circumstances will come to define Iran’s labor market. Senior executives at Iranian firms ought to make their preparations. Retaining the best talent is critical to Iranian firms taking on the role of vital partners in the domestic marketplace along with being able to compete effectively against foreign firms that will be entering at break neck speed.

In the middle of this reorganization of the labor market, young Iranian workers stand to gain so much, as a revitalized economy offers the promise of realized dreams for both personal and career progress. 

Photo Credit: Washington Post 

Iran’s Capital Markets: Securitizing the Future

The future of the Iranian financial sector might be vastly different to what we—those who work in the industry– can imagine today. With this in mind, the potential for making the financial sector a driving force for Iran’s economic reboot must considered as supremely important. 

For Iran to overhaul various aspects of the domestic economy, it must attract at least $1,000 billion dollars in investment during the next decade. If for any reason our economy fails to absorb the required level of investment, not only will we not achieve the goals of Iran’s 2025 Vision Plan, but we will also miss a historic opportunity to enhance our rightful position in the global economy.

Therefore, it is our obligation to obtain the much-needed investment for Iran. 

The unusual hurdles imposed on our economy have culminated in an unfortunate economic stagnation. This situation has adversely impacted a country with an enormous potential, which would otherwise be most appealing to the international investor. 

In order to ensure sustainable economic growth, Iran will need to divert considerable financial resources into infrastructure and large-scale projects. These projects may be unprecedented in size and complexity for Iran. 

The key point is that conventional methods for promoting investment in Iran, particularly foreign direct investment, have become less appealing and are insufficient to effectively address international investors’ concerns, especially after exposure to the world economic crisis. 

In the case of Iran, this is further aggravated by the harsh conditions imposed on investment due to sanctions. Knowing this, two factors have a crucial role in leading potential investors: transparency and the ease of exit from ventures, i.e. favorable exit strategies. 

Iran’s finance sector leaders will need to be flexible and innovative in financial engineering and offer a range of financial instruments to investors, either domestic or foreign. This leads to the conclusion that for those of us in the sector there is no strategy more important or effective than securitization. 

Securitization is the financial practice of pooling various types of debt, illiquid assets, and/or groups of assets into more liquid financial instruments in order to sell them to third party investors. Securitization promotes liquidity in capital markets by making it easier for investors to buy and sell (enter and exit) investments across sectors. 

During the last decade, various new types of project financing methods have been devised for infrastructure investments in Iran. Compensation Arrangements, ranges of Build-Operate-Transfers (BOTs), and, recently, Public-Private Partnership agreements (PPPs) alongside the issuance of participating notes, corporate bonds and Sukuks are examples of our endeavors for financing projects. 

Despite our achievements, we do not fully realize the imperative of giving potential investors even greater confidence through intelligent securitization.  I have to stress that investors are clever people, they know how to assess projects and how to control their business risks, but they need the right vehicles. 

By confidence I mean providing investors with transparent and reliable information as well as reliable platforms for transacting securitized projects and investments. Investors must be confident that whenever they decide, they are able to sell their investment at a fair price.

Therefore, I believe that securitization, though not the only way the only imperative to improve the investment climate, is nonetheless critical. Securitization offers the best and most efficient methods of financing the country’s projects in the post-sanctions era in the shortest period of time.

Now the question is what are the required grounds for new best-practices? 

Certainly, we need to review our legislative environment and implement the required amendments, remove the unnecessary barriers and in general, improve our “doing-business” indices. In addition to the above, Iran’s finance marketplaces remain a vital part of this development plan. Specifically, securitization needs markets where assets can be effectively valued and traded. 

A notable point is that Iran has the oldest capital market in the region, established in 1968. With almost 50 years of experience, Iran has a robust background in this area and thanks to the new Securities Market Act, ratified by the Parliament in 2004, the country has had the opportunity to modernize its financial market and establish almost all the frameworks required by global best-practice. 

I will not elaborate on the structure of Iran’s capital market here, but it is worth mentioning that during the past decade, we have observed tremendous developments in the fields of financing, financial markets administration, and related technologies. 

These changes include a notable portion of the privatization program within the framework of economic reforms, which was carried out through the Tehran Stock Exchange (TSE) and the Iran FaraBourse (over-the-counter market). 

The Iran Mercantile Exchange and Iran Energy Exchange, too, have had an important and constructive role in improving commodity markets’ efficiency and transparency in our economy, which deserves its own detailed discussion. However, it is noteworthy that the share of the contribution of the capital markets to Iran’s GDP is still unsatisfactory. 

Where the main impetus behind long-term sustainable economic growth is national and foreign capital investment, it becomes imperative that new methods based on securitization be devised, which at the same time make further development of the financial markets a necessity. We, therefore, need to introduce new players in our financial markets including new companies and entities, which can develop new and innovative methods, products, and instruments of finance based on securitization, educate a new generation of specialized experts, enter joint ventures with reputable international firms, obtain and develop new systems in the area of financial technology, and more.

International investors continue to recognize that the Iranian financial sector, with its great potential, will be one of the most active, (and hence profitable) industries in the region. But these investors will only act with confidence once sanctions are lifted and Iran’s new phase of securitization and transparent sector development begins. 

Photo Credit: The Iran Project

Culture and Tourism in Iran: Lessons from Italy

In this day and age, cultural tourism plays a crucial role in establishing relations between countries. Awareness is spreading about the amazing opportunities that a prudent enhancement of the cultural patrimony can deliver. The connections between diplomatic relations, commercial opportunity, and touristic exchanges are powerfully joined in the idea of cultural tourism.

Iran and Italy are two countries that are both heirs and custodians of a huge historic, artistic, and cultural heritage. In fact the preservation of such heritage has been recently been the basis for close collaboration. Italian archaeologists have worked on sites in Persepolis and Esfahan among others. The Citadel of Bam earned UNESCO World Heritage status shortly after the devastating 2003 earthquake, largely because of the reconstruction efforts of the Italian Istituto Superiore per la Conservazione ed il Restauro.

But cultural exchange is much more than a commitment to history. Cultural exchange can be a useful means of supporting the dialogue among civilizations necessary to establish a model for development and growth informed by and linked to a national heritage.

I would summon, in this regard, two scenarios where the Iranian culture has recently been able to introduce itself globally as an absolute excellency, while still showing openness to interaction with other national cultures, starting with Italian culture itself.

The first scenario is exemplified by the film industry, in which Iranian directors have been acclaimed among the world cinematic masters. These master filmmakers include Abbas Kiarostami and Mohsen Makhmalbaf, whose works have been applauded and awarded by the most important international film festivals, including the Venice Film Festival. Jafar Panahi triumphed in 2000, winning the Leone D’Or for his film The Circle. In 2008, Abbas Kiaorastami won a special honor for his remarkable contribution to cinema.

Iranian contemporary art has also made its way to Italy and the city of Ferrara, where, in 2010, six Iranian world-renowned women artists had exhibited their work as part of the Fourteenth Biennale Donna.

Reflecting on the origins of Iranian contemporary art, I also think about the exceptional importance of Iranian craftsmanship which constitutes a heritage of incredible artistic value by itself, and which should definitely be more acknowledged and appreciated worldwide, as it is one of the foundations of Iran’s national identity.

These are just a few examples of the relevance and the richness of the Iranian civilization, which could become the premise for a virtuous exchange between the civilizations of countries—even those seemingly different in regard to sensibilities and culture.  

On this point, I quote a passage from the memorable speech given by President Mohammed Khatami to the United Nations on September 5th, 2000, during a round table about dialogue among civilizations:

In order to provide natural unity and harmony in form and content for global culture and to prevent anarchy and chaos, all concerned parties should engage in a dialogue in which they can exchange knowledge, experience and understanding in diverse areas of culture and civilization. Today it is impossible to bar ideas from freely travelling between cultures and civilizations in disparate parts of the world. However, in the absence of dialogue among thinkers, scholars, intellectuals and artists from various cultures and civilizations, the danger of cultural homelessness seems imminent. Such a state of cultural homelessness would deprive people of solace both in their own culture and in the vast open horizon of global culture. 

While I was serving my country as Minister of Cultural Assets and Activities and of Tourism, I went on an official trip to Iran. On that occasion— and during a subsequent trip— I had the chance to recognize and appreciate the greatness of the Iranian cultural heritage. My experience made it clear that by leveraging strength of its cultural heritage Iran could stand to develop a valuable tourism model. As my former ministerial title demonstrates, the relationship between culture and tourism has been vital to Italy’s economy. The tourism sector contributes about 10% of the country’s overall GDP.  Iran ought to follow in the Italian model to protect its cultural heritage, even if the pursuit of economic interests is a primary aim.  

The bond between culture and tourism in Iran is clear and undeniable. Iranian artistic and environmental heritage represents one of the key resources for the creation of a sustainable tourism model, as it defines the country's identitarian traits as an attractive destination. If Iran’s heritage is properly utilized as one of the country’s fundamental touristic levers, inbound tourism would become an exceptional way to guarantee international awareness about its cultural assets, promoting efforts and providing funding to preserve and protect cultural heritage. The fruitful link between culture and tourism would emerge as a virtuous cycle, one that can enhance the potentialities of both areas, without undermining their complex and specific peculiarities.

I firmly believe that tourism related policies in Iran should follow the path of environmental, cultural and social sustainability in order to produce vital income and employment. Looking to successful practices in Italy would be my best possible advice. Future Iranian tourism policies must be correctly devised, so that development is truly respectful of the artistic and historical landscape.

In this way, Iranian tourism could represent both a means of economic growth and means to present a new image of Iran, which might overcome the prejudices towards the country to which Western nations are often induced. The point is to consider every cultural asset as a unique public good, deserving of protection and investment.

Such a commitment, by the way, is already written in the history of Iran, with its tradition of public endowments. Devising renewed commitment to public goods, and how they ought to be developed involves the analysis of the whole Iranian political, economical and social system. Cultural and environmental assets cannot be mere treasures, tightly owned and exploited. 

Tourists are becoming harder to please as consumer characteristics like income, tastes, and habits diversify. Such demand could be only satisfied by similarly diversifying the possible combinations of Iran’s cultural offerings, adjusting them to more and more complex requests. To do this work, private enterprise will need to bring its energy and expertise to the table, forging new public-private partnerships. It would be also advisable to enact specific tourism policies, which promote innovation through the application of new technologies.

The future of Iran's inbound tourism will be determined by the ability to build networks, which must reflect the true potential of a country both rich in history and eagerly awaiting the future. Government bodies, private businesses, community organizations, academic institutions, and other stakeholders must actively seek synergies in the spirit of cooperation. The project to preserve and promote Iranian cultural heritage is both crucial and thrilling. 

Photo Credit: Farzad Gavari

Sanctions in the High Courts: A Lawyer’s Perspective

The Joint Comprehensive Plan of Action (JCPOA) framework agreement reached between the P5+1 countries and Iran relating to Iran’s nuclear programme is a welcome development. This is a historic moment, and the start of a new relationship between Iran and the West. Iran’s people, and the businesses they depend on, have been suffering because of the sanctions imposed against Iran; now their resilience has finally paid off. Over the next three months, the framework deal will be put into writing and signed, bringing an end to the long-standing dispute over Iran’s nuclear programme.

The framework deal was reached after more than a decade of halting negotiations between Iran and the West, but substantial progress was only made after the election of the current Iranian President Dr. Hassan Rouhani in August 2013. Rouhani’s election opened the door to new political opportunities.

But even before the JCPOA was being formulated by diplomats in Lausanne, progress was being made on the legal opportunities around Iran sanctions. In particular, progress could be seen in the judgment of the UK Supreme Court in the Bank Mellat case, as well as a tide of judgments from the European Court of Justice over the last 2-3 years. These judgements annulled the economic sanctions, which had wrongfully been imposed on Iranian private entities and individuals, and challenged Western officials to apply sanctions with greater discretion and legal justification.

My firm, Zaiwalla & Co has made significant contributions to these developments, by giving legal advice and appearing in Court to present the challenges brought by various Iranian individuals and businesses which were targeted under the sanctions regimes imposed on Iran by the United Kingdom, the European Union, the United States and the United Nations. We have specialised in representing overseas parties, including foreign governments, for over 30 years, and Iran disputes have posed a particular challenge in this time.

The pressure which the West built on Iran by way of a particularly wide range of blanket sanctions on the financial and oil & gas sectors of Iran’s economy was struck a blow when my firm succeeded for Bank Mellat in the EU General Court, cancelling the sanctions against Bank Mellat. The case demonstrated how sanctions, though often well-intentioned, were applied carelessly, with limited evidence for the purported justification.

I remember that during the course of the hearing before the European Court of Justice, the Chairman of the Judge’s Tribunal asked the EU’s Advocate to clearly present the evidence against Bank Mellat. The Advocate gave a vague reply, upsetting the judge. The European Court was not going to be satisfied with vague evidence and insisted on a clear legal justification for the applied sanctions. When this was not forthcoming, Bank Mellat emerged with the first-ever successful challenge in the European Court brought by an entity listed by the EU Council under Iran sanctions. 

Soon thereafter the UK Supreme Court struck a further blow against the sanctions, by holding the listing of Bank Mellat by the UK Government (parallel to the EU sanctions) as both unlawful and irrational. During the course of this trial, for the first time in the history of the Supreme Court, the proceedings included a secret "closed" hearing to consider the intelligence evidence which the British Government said it had about Bank Mellat’s involvement in Iran’s nuclear proliferation. Bank Mellat’s officers and lawyers were sent outside the court for this hearing. Nonetheless, following that closed hearing the Supreme Court held that the intelligence evidence was not sufficiently credible, and gave judgment in Bank Mellat’s favour.

The Supreme Court then referred the matter back to the High Court for the assessment of the losses which Bank Mellat had suffered as a result of the sanctions— losses it could claim as damages. Bank Mellat has brought a claim in the sum of over USD $4 billion against the British Government as damages for its wrongful listing. This claim is currently before the English High Court.  These two judgments, which my firm obtained from the EU Court and the UK Supreme Court, set the precendent for other Iranian entities, who could now hope to succeed with their challenges against the Iran sanctions.

The courts in these judgments said that it was unlawful for any private person or entity to be targeted with sanctions without there being evidence of any wrongdoing on that person’s part. Sanctions are strong political tools, and on many occasions prove to be an alternative to war by compelling another country to change its policies or in a way “penalise” a country for its wrongful actions. Nonetheless, the highest courts in the UK and the EU have confirmed that they must not directly damage ordinary and innocent citizens.

Furthermore, in cases of sanctions imposed by the EU, in relation to the Iranian nuclear programme, strong emphasis has been placed on the importance of two primary obligations which fall upon the EU Council: firstly, the duty to provide proper reasons for the listing of each applicant challenging the imposition of sanctions and, secondly, the duty to disclose all evidence supporting the listing, including the listing proposal by any member state, to the applicant in good time for them to respond to any such evidence.

In multiple cases, including those of Bank Tejarat and Bank Mellat, both of which were represented by Zaiwalla & Co, the failure of the EU Council to adduce sufficient evidence before the Court led to the Court granting favourable judgments in favour of the applicants. In the Bank Mellat and Bank Tejarat cases, the European Court also emphasised that the EU Council should not sanction an entity based solely on the fact that another country had already imposed sanctions. Instead the EU Council is required to conduct an independent review of the underlying evidence and satisfy itself that grounds exist before sanctioning the entity. These decisions remind policymakers that sanctions, while employed as a tool of political coercion, must remain consistent in application with legal norms.

To this extent, the UK Supreme Court and European Court judgments have undoubtedly put pressure on the West to be more realistic about the promise of sanctions relief as codified in agreements like the JCPOA. This is because the possibility of the payment of damages to wrongly sanctioned entities would have a serious effect on the economies of the UK and the EU member states, because the damages will have to be paid out of taxation. This would have also placed pressure on the US administration because it is very likely that the UK and EU Council imposed their sanctions at the insistence of the US administration. 

The unjustified sanctions against these entities have caused irreparable damage to their goodwill towards and established business reputation among the international community. The agreed JCPOA framework is a big step towards re-establishing the reputations and positions of such entities in the international economy.

It is very important to note that the current wide range of blanket and targeted nuclear related sanctions in respect to Iran will remain in place until further progress of the ongoing negotiations between Iran and the P5+1 group. Although the framework agreement envisages great business opportunities in Iran for foreign companies, foreign firms and individuals must be cautious to abide by the current restrictions until they are formally lifted.

Additionally, sanctions imposed by OFAC (the US Office of Foreign Assets Control) are very extensive and could potentially cover any transactions in US dollars with an Iranian person and/or entity. Furthermore, international concerns such as those raised by the Financial Action Task Force (“FATF”), which is the global standard setting body for anti-money laundering and combating the financing of terrorism to encourage better compliance with the relevant regulations, remain in place in the case of Iran. It is therefore vital for anyone who hopes to do business in the newly open Iran to obtain extensive legal and financial advice first.

Photo Credit: New York Times