Can Blocking Regulations Help Europe Protect Its Iran Business From Trump?
◢ In the last week, European business leaders and policymakers have grown more vocal about the possibility that the European Union would employ blocking regulations to protect European businesses from the reach of US secondary sanctions on Iran.
◢ Despite limits to their legal effectiveness, blocking regulations can serve as part of the suite of political, legal, and commercial measures employed by European governments to protect their businesses in Iran.
In the last week, European business leaders and policymakers have grown more vocal about the possibility that the European Union would employ blocking regulations to protect European businesses from the reach of US secondary sanctions on Iran. These regulations would penalize European companies for complying with secondary sanctions, which may snapback if the Trump administration decides to withdraw from the Iran nuclear agreement.
Total CEO Patrick Pouyanné became the first high-profile European executive to publically call for such measures to be considered, disclosing that Total has been in discussions with French and European authorities about “means to protect investments already made in Iran, even in the case of the return of sanctions.”
Speaking at a conference in Paris last week, Denis Chaibi, head of the Iran Task Force of the European External Action Service, stated that the EU was “looking at a number of possibilities” regarding the regulations.” In his assessment, “it is not complicated to do it legally in that the legal instrument exists, but it doesn’t require a huge internal debate,”
These public statements come as European concerns grow regarding the Trump administration's ultimatum to “fix” the Joint Comprehensive Plan of Action. The critical deadline is May 12, when the United States will need to once again waive its secondary sanctions on Iran. Failure to do so would see secondary sanctions “snapback,” exposing European companies to extraterritorial penalties for their commercial activities in Iran.
But even if the European Union finds the political will to reinstitute blocking regulations in the event of snapback, it is unclear whether they fully effective as a standalone measure to protect European trade and investment in Iran. Blocking regulations are a legal mechanism which seeks to mitigate the extraterritorial effects of sanctions under Public International Law (PIL), the body of law that governs relations between sovereign states and their unions, such as the European Union.
International trade attorney, Edward Borovikov, managing partner at the Brussels office of Dentons, a global law firm, notes that under international law “Sovereign states are expected to exercise moderation and restraint if their legal acts may affect vital economic and commercial interests of another state. But sometimes states violate the principle of restraint for their own national security considerations.” The snapback of secondary sanctions by the Trump administration would represent once such case. In such situations, “there is no efficient and universal legal avenue under PIL to challenge such non-compliance,” says Borovikov.
While the World Trade Organization (WTO), which was established under the authority of PIL, may seem a venue to challenge extraterritorial sanctions which restrict trade in goods and services, it is unlikely Europe would be able to successfully challenge the snapback of U.S. sanctions under the WTO’s legal authority.
Article XXI of the General Agreement on Tariffs and Trade (1994) declares that nothing in WTO rules will “prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” Borovikov explains that this exemption “means that member states can depart from WTO commitments on trade in goods and services” and points out that while there have been several attempts to bring to WTO adjudication disputes on the application of national security exemptions, “none of the cases ended with conclusive guidance.”
In 1996, the European Union began a dispute process against the United States with regard to extraterritorial sanctions against Cuba. This dispute reached the state of WTO consultations. But ultimately, the EU and US reached a political solution in which the US assured that its secondary sanctions would not be enforced upon European companies. The WTO case was suspended.
The political solution was necessary for a simple reason. “Even if the WTO had found in the favor of the EU, deciding that the national security exemption did not apply, the United States was never going agree with a WTO’s interpretation of its national security requirements,” observes Borovikov. “The idea that the United States would comply with WTO recommendations in such a situation is hard to believe.”
Given the dead end presented by the WTO dispute avenue, the EU has sought legal mechanisms that rely on the legal authority of the union and its member states. The legal act is the 1996 EU Blocking Regulation. This regulation was established in response to US sanctions on Iran, Cuba, and Libya. The regulations prohibit EU entities and courts from complying with foreign legal acts, such as sanctions laws, listed in an annex. Borokivov explains that “in principle any new extraterritorial laws of any third country may be added to the Annex and indeed help EU persons to continue business with a sanctioned third country.” However, the past success of such regulations in enabling European companies to continue conducting business in these jurisdictions such as Iran was the result of political rather than legal influence.
Borovikov warns that these blocking regulations “cannot provide full protection from secondary sanctions because if the EU persons doing business in the US start economic activities in the Iran, they are at risk of being penalised under the US sanctions regime.” Even if the European Union seeks to penalize its companies for complying with US sanctions, “it is clear that a lot of EU companies would simply face a dilemma between doing business in the US or Iran and where to accept the penalty,” he says.
Given the fact that the US market both frequently offers more attractive economic opportunities and poses more severe penalties and consequences for non-compliance with US law, most companies are likely to wind down their Iran operations and pay any penalties that the EU or their national governments may levy under the blocking regulations.
However, the discussion about blocking regulations is nonetheless worthwhile. Borovikov notes that the prospect of such regulations has in the past played “an important role in bringing about an acceptable solution. The regulations are secondary to the political process between the US and EU and its member states that will hopefully lead to an understanding on Iran business.”
Ellie Geranmayeh of the European Council on Foreign Relations, echoes this assessment: "The threat of reviving the EU blocking regulation in itself can be a useful political tool for Europe to create a cost for the Trump administration and make it think twice about its actions." Moreover, while the blocking regulations may only be partially effective for major multinationals, they can "provide an avenue for smaller-medium sized companies in Europe and Asia that have little or no US exposure to continue conducting business in Iran in non-dollar currencies," says Geranmayeh.
Multinational executives seem to agree. In a recent survey conducted by Bourse & Bazaar and commissioned by International Crisis Group, a substantial 54 percent of senior executives indicated that “assuming Iran remains committed to the nuclear deal,” blocking regulations, which would protect companies from U.S. penalties, would positively affect the “decision to invest in Iran.”
Blocking regulations can serve an important role as part of the suite of political, legal, and commercial measures that can be employed by European governments to protect their businesses from the consequences of snapback. At a time when the economic quid-pro-quo that underpins the nuclear deal is under threat, each and every such measure ought to be considered.
Photo Credit: WTO
Total CEO Pouyanné Considers Measures to Protect European Business in Iran
◢ In a major interview given to French newspaper Le Monde, Total CEO Patrick Pouyanné was asked about the “American threat” to the company’s “important gas project” in Iran.
◢ Pouyanné’s forthright response marks perhaps the first time that a major European executive has publicly called for a diplomatic intervention to protect commercial interests in Iran. He points to the 1990s blocking statutes and sanctions waivers as a potential tool in the current environment.
In a major interview given to French newspaper Le Monde looking at Total’s strong performance in 2017, CEO Patrick Pouyanné was asked about the “American threat” to the company’s “important gas project” in Iran. Pouyanné’s forthright response marks perhaps the first time that a major European executive has publicly called for a diplomatic intervention to protect commercial interests in Iran.
Total’s CEO explained that the South Pars project was “progressing well, without delay, and [Total] continues to work, even if the situation with the American Congress is rather vague.” He noted that even if the Americans “decide to exit the nuclear agreement and if secondary sanctions return in place,” it would pose a “real question” for the French energy giant.
However, echoing comments made to reporters on the sidelines of Davos, Pouyanné did not cast snapback as an automatic game-over for the South Pars project. Rather, he suggested that it was necessary to “clarify the horizon for European business working in Iran.”
He explains that Total has been in discussions with French and European authorities about “means to protect investments already made in Iran, even in the case of the return of sanctions.” Pouyanné points to the experience of European blocking statutes and sanctions waivers applied in the 1990s which proved sufficient to to protect Total’s gas projects at the time. Pouyanné concludes by noting that it is “up to European diplomats to consider these questions.”
The confidence of Pouyanné’s response stands in stark comparison to the general uncertainty that has gripped the business community and will be seen as an important signal. The landmark USD 3.8 billion South Pars project is seen as a bellwether for the larger project of Iran’s post-sanctions economic recovery.
However, Total is far from the only major European multinational engaged in the Iranian market. Pouyanne was one of select group of European CEOs invited to dine with Donald Trump at a special dinner held during the American President’s trip to the World Economic Forum in Davos. Other guests included Siemens CEO Joe Kaeser, ABB CEO Ulrich Spiesshofer and Volvo CEO Martin Lundstedt. Overall, nine of the fifteen companies represented at the dinner are currently active in Iran, and a further five have had a historical presence in the market. Pouyanné’s peers are likely to share his sentiments on the need to protect European interests in Iran and the wider global economy.
While the legal value of blocking statutes or sanctions waivers is questionable given the greater interconnectivity in global markets and greater reticence of the banking sector to engage Iran when compared to the 1990s, the political message behind such measures could be valuable, enabling companies to seek creative solutions to structure their Iran engagements in a way that avoids sanctions exposure.
In a recent survey conducted by Bourse & Bazaar and commissioned by International Crisis Group, a substantial 54 percent of senior executives indicated that “assuming Iran remains committed to the nuclear deal,” blocking statutes, which would protect companies from U.S. penalties, would positively affect the “decision to invest in Iran.”
Photo Credit: Total
In First Survey Since Iran Protests, Expressions of Solidarity as Economic Outlook Darkens
◢ A timely new survey published by the University of Maryland’s Center for International and Security Studies (CISSM) offers the first insights into Iranian public sentiments following last month’s protests.
◢ The results underscore the central role that economic frustration played in the recent mobilizations and illuminate a common thread of economic frustration. A clear 58 percent of respondents believe that Iran's economic conditions are worsening, the highest proportion since May 2015.
A timely new survey published by the University of Maryland’s Center for International and Security Studies (CISSM) offers the first insights into Iranian public sentiment following last month’s protests. The representative survey, conducted by research firm IranPoll between January 16 and January 24, was derived from telephone interviews of over 1,000 Iranians and covered a broad range of issues.
The results underscore the central role that economic frustration played in the recent mobilizations and illuminate a common thread of economic concern around domestic issues, such as corruption and mismanagement, and the perception of foreign interference, particularly around the implementation of the Joint Comprehensive Plan of Action (JCPOA).
A clear 58 percent of respondents believe that Iranians economic conditions are worsening, the highest proportion since May 2015. In a refutation of the characterization of the protests as a political uprising, just 15 percent of respondents agreed with the sentiment that “Iran needs to undergo a fundamental political change.” Economic grievances elicited far greater sympathy. Moreover, respondents were generally satisfied with the response of authorities, with 66 percent responding that the police responded well to the unrest.
Looking to international affairs, public confidence in the JCPOA has plummeted, and Iranians are beginning to perceive the agreement in more absolutist terms. Iranians continue to blame the lack of economic progress on the hostile posture of the United States. A clear majority of respondents, 73 percent, believe that multinational companies are “moving slower than they could to invest in Iran.” Of these respondents, 82 percent attribute the slowdown to businesses encountering “pressure or fear of the United States,” a proportion that has risen from 75 percent in May of last year.
President Trump’s decertification of the Iran nuclear agreement in October of last year has no doubt compounded doubts about American intentions. Just 12 percent of Iranians express confidence that the United States will live up to its obligations under the agreement, down from 24 percent in May of 2017 and 45 percent when the deal was first agreed in September of 2015.
In December of last year the largest proportion of respondents, 51 percent, believed that the United States had “lifted the sanctions it agreed to lift in the JCPOA” but was “finding other ways to keep the negative effects of those sanctions.” In this latest survey, the attitudes have shifted. The majority of respondents, 60 percent, now believe that the United States “has not lifted all of the sanctions it agreed to lift in the JCPOA.” This shift in opinion may reflect Iranian perceptions regarding the postures of the Obama and Trump administrations towards the deal. On a scale out of ten, 69 percent of Iranians rated Trump’s Iran policy at zero, or “completely hostile.” This compares to 50 percent in December 2016, before Trump formally entered office and had the opportunity to put his rhetoric into action.
Overall, while more than half of Iranians still approve of the JCPOA, support is wavering, now measures at just 55 percent approval, down from 67 percent in June of last year. The decline in approval for the deal is tied to the fact that Iranians have yet to see the promised economic benefits. A resounding 74 percent of respondents believe that living conditions have not improved “as a result of the JCPOA.”
Troublingly, these frustrations are making Iranians more comfortable with possible drastic political responses. When asked what Iran should do in the event the "United States decides to withdraw from the JCPOA agreement and reimpose sanctions on Iran, but other P5+1 countries remain committed to the agreement and do not reimpose sanctions," 52 percent of respondents suggests that the Iran should withdraw from the JCPOA. The inability for policymakers to demonstrate the value of the deal is opening political space and burnishing popular support for those factions in Iran who wish to see its demise.
However, Iranians do not intend to lay blame for economic stagnation at the hands of outside forces alone and 87 percent of respondents believe that the Iranian government should take “steps to make Iran’s business environment more appealing to foreign businesses and investors.” Despite strong public support for such reforms, only 58 percent of Iranians report knowledge that the government is taking such steps.
Moreover, Iranians consider “domestic economic mismanagement and corruption” as having a greater negative impact on the economy than “foreign sanctions and pressures” with 63 percent of respondents highlighting the former as the primary concern. To this end, Iranians wish their government to prioritize efforts to alleviate poverty, stabilize food prices, and better manage the environment. In addition there is strong agreement that the government should not cut cash or fuel subsidies. A definitive 96 percent of Iranians want the government to do more to fight financial and bureaucratic corruption. Encouragingly, most Iranians remain optimistic about the future. When asked whether today’s children will be financially better or worse off than their parents, 49 percent respond that they will be better off, whereas 43 percent believe they will be worse off.
For the Rouhani administration and for Iran’s wider political establishment speak to the urgency of economic reforms. In recent statements, Rouhani has admonished his fellow politicians on the utmost importance of heeding the demands of the people, suggesting that the Islamic Revolution itself resulted from the inability of the Pahlavi monarchy to respond to the popular will. Such surveys offer a clear assessment for the administration of the challenges at hand. The question remains whether Iran’s various political factions can find sufficient common ground to find solutions.
Photo Credit: Tasnim
As Delays Mount in Iran, Executives and Employers Face Tough Career Choices
◢ In multinational companies, the prospect of earning a promotion is largely tied to the ability to meet targets and hit milestones with speed. For exectuives, working on Iran-related projects in the present environment makes this difficult to do.
◢ For employers, longer project timeframes make management and staffing more difficult. In the current environment, the main concern around human resource management is not recruitment, but retention. To improve retention, companies finding ways to encourage and reward persistence
In multinational companies, the prospect of promotion is largely tied to the ability to meet targets and hit milestones with speed. Working on Iran-related projects in the present environment makes this difficult to do. When asked to evaluate the pace of trade and investment as part of a recent Bourse & Bazaar survey, commissioned by International Crisis Group, 83 percent of senior managers at multinational companies indicate that companies “are moving slower than they could” to engage in the Iranian market. These delays are not minor: 39 percent of executives report being delayed by six to twelve months, 16 percent report being delayed by one to two years, and 33 percent report delays of more than two years.
Some multinational executives are facing delays equivalent to the total time they have spent in the Iran job role; the majority of executives surveyed have been working on Iran for less than three years. As sanctions-relief neared, new teams and offices were established to handle Iran business, with companies often relocated executives to Iran. For these executives, who arrived in their job roles full of promise, the mounting delays have a personal and career impact. For employers, longer project timeframes make management and staffing more difficult.
Iran can be an isolating assignment within large organizations. Companies are increasingly separating Iran from the management of the GCC in response to regional politics, sometimes placing the country among Turkey or Central Asian markets. But very often, Iran is treated as a kind of an island unto itself, meaning that country managers are even more dependent to demonstrate success within the business unit.
In the assessment of one aviation finance executive, who asked to remain anonymous due to the sensitivity of the issues discussed, delays in aircraft sales to Iran, like other commercial deals, see executives repeatedly hitting “roadblocks out of their control.” The frustrations inherent in working with Iran mean that many of these executives and advisors may opt “to move away from Iran for the benefit of their career path.” For example, business development executives may seek to shift focus to markets where they are more likely to hit their sales targets, “in order to get their bonuses.” Likewise, lawyers working on Iran projects are “often incentivized with success fees. If those fees seem unlikely to materialize, they will move on to other projects.”
When asked whether he is concerned about such attrition within his own team, the aircraft finance executive notes, “I have started thinking about it. If I lose a member of my legal team, or if there is a change in the sales team at one of our client companies, it makes the Iran project really complicated. For the replacements, a learning process starts all over again and in some cases expertise won’t be easy to replicate or replace.”
But in the view of Marc Mulder, who leads Wise&Miller, an executive search firm active in Iran, the importance of succession planning is already a central part of the recruitment strategies of both multinational and Iranian companies.
While nearly half of executives surveyed presently expect to work in Iran for less than five years, Mulder observes that this is “a perfectly normal level of churn for senior roles in such companies.” In fact, many companies are hiring with specific regard to managing employee turnover. For example, Mulder describes how “a company might hire an international CFO knowing that they will spend just three years in Iran. But in that period, they will be expected to train the local finance VP so that they can become the long-term CFO.”
Importantly, Iran remains an attractive destination for international managers. Mulder believes that for certain executives, Iran is appealing precisely because of the challenges it poses: “Candidates often move to Iran eagerly. They know it is a complex market, but they like the idea that they will be tested in the role. Working in an emerging market is exciting for them.”
In the current environment, the more difficult aspect of human resource management is not recruitment, but retention. The main risk in succession planning is low employee loyalty. Iranian executives are easily lured away by a salary bump and are even more concerned with career stagnation than their international peers. After all, Iranian employees are less at liberty to look for opportunities beyond the Iranian market. “Retention becomes a problem if the VP you just spent three years training moves away from the company after just one year as CFO. Then you really are starting from scratch,” notes Mulder.
To improve retention, companies are investing in human resources management. Mulder has observed strong interest among Iranian companies “for help in developing the soft management skills that keep people engaged within an organization, such as coaching and team-building. It is part of an effort to make people feel invested in the business.” If companies can develop these competencies, they will be able to better manage the delays, sufficiently encouraging and incentivizing their teams to push through roadblocks.
Overall, companies need to find ways to encourage and reward persistence. For the most experienced country managers, an opportunity to test these qualities of management is often what brought them to Iran in the first instance. These qualities are difficult to pass on, but it is clear that the employees they oversee will have no shortage of opportunities to test their persistence as they advance their careers in challenging Iran.
Photo Credit: Bourse & Bazaar
Iran's Entekhab Set to Acquire Dongbu Daewoo In a Tale of Unfinished Business
◢ Iran’s Entekhab Industrial Group is reportedly poised to acquire majority ownership of Dongbu Daewoo, a manufacturer of appliances and consumer durables, beginning a new chapter in an already complicated saga.
◢ Entekhab, Iran’s leading appliance manufacturer, first sought to acquire Daewoo in 2010 for USD 513 million. Eight years later, a new bid has been made, reportedly for USD 188 million. If the deal goes through, it would be a rare example of an Iranian firm on the buy-side of cross-border M&A.
The headquarters of Dongbu Daewoo Electronics are located in a skyscraper on “Teheran-ro” (Tehran Street) in downtown Seoul, South Korea. The street is the address for so many of Korea’s leading industrial and technology companies that the area is called Tehran Valley, a nod to Silicon Valley. The street name dates back to 1977, when, in a gesture of friendship, Seoul’s city government proposed exchanging street names with Tehran, which counts Seoul Street among its main thoroughfares.
The connections to Iran run deeper for Dongbu Daewoo than for other companies which share the curious address. While their headquarters are currently located on Tehran Street, new owners may soon be calling from Tehran itself.
Iran’s Entekhab Industrial Group is reportedly poised to acquire majority ownership of Dongbu Daewoo, a manufacturer of appliances and consumer durables, beginning a new chapter in an already complicated saga.
Entekhab, Iran’s leading appliance manufacturer, first sought to buy Dongbu Daewoo in 2010. Daewoo’s then creditor, Woori Bank, had initially selected Entekhab’s bid of USD 513 million over an offer from Sweden’s Electrolux, a globally recognized appliance maker. But the deal would collapse a year later, reportedly over haggling on the final price and delays in Entekhab’s search for financing at a time when international sanctions were tightening. At the time of the failed bid, Daewoo disclosed that sales via Entekhab accounted for less than 5 percent of the Korean firm’s total sales. Some industry figures questioned the commercial logic of Entekhab’s move, especially at a time when Iranian ownership was an increasing liability.
Yet the door would remain open for Entekhab. Electrolux likewise failed in its subsequent effort to make the acquisition. By that point, Daewoo’s creditors had attempted to offload the company five times. Entekhab pursued legal action against Daewoo’s creditors after being passed over. Meanwhile, the Korean firm limped along with an injection of capital from financial investors.
Entekhab has been a committed suitor, and its commercial relationship with Daewoo persisted. The Iranian firm has a longstanding relationship with the Korean appliance maker whose products it has both imported and manufactured under license for decades. In May of last year, the companies signed an expanded supply contract.
Now Entekhab has a second chance to make the acquisition. Their patience may be rewarded. Reports suggest that the new deal could be worth just USD 188 million, considerably less than the 2010 bid. Given that Daewoo generated USD 1.4 billion in revenue in 2016, the company’s valuation points to considerable structural issues. Daewoo has a large international presence, with 80 percent of sales generated outside of South Korea, but its growth has lagged behind competitors such as Samsung and LG.
The deal is a rare one. Iranian companies are rarely on the buy-side of cross-border M&A. Entekhab’s move would be a landmark deal, and would follow a pattern by which industrial players from emerging markets have increasingly sought synergies and marketshare outside their home markets. Tellingly, if Entekhab succeeds in its latest acquisition effort, it will have beaten out a rival bid from Turkey’s Vestel.
Entekhab is a large enterprise by Iranian standards. Entekhab Industrial is a subsidiary of Entekhab Investment Development Group, which has interests in the steel, oil and gas, and petrochemical sectors. Underscoring its commitment to both consumer retail and partnerships with Korean firms, the group recently opened Iran’s first modern convenience store concept, CU Entekhab, in partnership with South Korea’s largest convenience store operator, BGF Retail.
Enthekhab Industrial boasts 5,000 employees, 12 manufacturing facilities, and over 200 retail outlets. The company holds the leading position in Iran’s valuable appliances market. In 2010, turnover was reported at USD 500 million. Entekhab would gain two things in the acquisition. First, it would acquire Daewoo's valuable technology and intellectual property. Second, it would inherit Daewoo's presence in 40 overseas markets, offering Entekhab new export growth potential for its Iranian-made goods.
But perhaps above all else, the deal would see an Iranian company completing unfinished business. Such persistence ought to be celebrated.
Photo Credit: Entekhab Group
Iran's E-Commerce and App Store Giants Continue March to Unicorn Valuations
◢ Two new investments by a Dutch-registered company have pushed Digikala and Café Bazaar to historic new valuations. Iran's e-commerce leader and largest app store are no longer the visionary startups of a few years ago, but rather ambitious and established enterprises.
◢ The investments were completed discretely, but point back to Sarava, which has reportedly raised new capital in Europe. The venture capital firm is poised to further expand its dominance in Iran's tech sector.
Update: Said Rahmani, CEO of Sarava, has given an extensive interview (in Persian) to Shanbe- Startupmag providing further detail on these investments.
In November, a government report detailing the first 100 days of President Rouhani’s second term, announced that Digikala, Iran’s leading e-commerce platform, had received a major new investment.
A section of the report tabulating recent foreign direct investment in Iran notes that an entity called International Internet Investment Coöperatief UA (IIIC) has made an investment of USD 100 million to acquire 21% of Noavaran Fan Avaze, the parent company of Digikala, which was founded by twin brothers Hamid and Saeed Mohammadi. Digikala did not respond to request for comment.
The size of the investment is notable as it values Digikala at USD 500 million, making it by far Iran’s largest digital enterprise, and bringing the company to a new milestone on the path to becoming Iran’s first so-called “unicorn,” a tech company with a USD 1 billion valuation. The valuation is also near the USD 580 million price Amazon paid for Souq, the Arab world’s leading e-commerce platform, earlier this year.
Famously, Digikala was valued at a widely reported figure of USD 150 million in 2014, an early indication of the immense potential for e-commerce in Iran’s large consumer market. The new valuation is consistent with the company’s growth. The company moved EUR 347 million (including VAT) worth of merchandise in the Iranian year 1395, representing a 81% growth in local currency terms over the previous year. Growth in gross merchandise value this year is expected to top 20%. But the timing of the investment is surprising, coming in a period of uncertainty when the pace of foreign investment has generally slowed.
The registered address for IIIC leads back to Private Equity Services, a Dutch company which provides domiciliary and corporate services to a wide range of investment companies. The use of a “Netherlands cooperative” structure is common for holding companies. The UA moniker denotes a cooperative with excluded liability, with at least two members.
IIIC was back in the headlines this week as Café Bazaar announced that the Dutch entity will make a EUR 38 million investment for a 10% stake in the company, which is Iran's leading app store.
The use of the cooperative structure makes it difficult to know the identity of Digikala and Café Bazaar's new shareholders. The new beneficiary shareholders are unlikely to be Dutch, despite Iranian news reports emphasizing the fact. Locating an investment company in the Netherlands is advantageous from a tax perspective because of a “participation exemption” on capital gains.
Corporate records indicate that IIIC has two subsidiary companies. The first is Regent Group Services, a Dutch company founded in 2016, as “a global E-Commerce and health sciences ecosystem platform.” The second is, Pulse & Pixel Group B.V., a Dutch company established in 2016 which shares its name with PPG, one of Iran’s leading digital media companies. According to public records, Farbod Sadeghian, a co-founder of PPG, is the corporate director of the Dutch entity. PPG signed an affiliation agreement with global communications giant WPP in 2016.
Tellingly, PPG, Café Bazaar, and Digikala share a common shareholder in Sarava, which owns 75% of PPG, 20% of Bazaar, and 61% of Digikala (as reported prior to the IIIC investments). A source familiar with the details of the Digikala and Café Bazaar deals confirmed to Bourse & Bazaar that IIIC is an international investment vehicle set up by Sarava itself and that the new investments follow a successful campaign which saw the company raise over USD 100 million in capital from foreign investors.
Despite the discrete nature of the transaction and the further expansion of Sarava's dominance in the ecosystem, for Iran’s digital entrepreneurs, news of the investment should be welcome. Iran’s tech sector is still at an early stage in its development and is therefore vulnerable to any near-term reduction in the pool of available venture capital. That foreign investors remain committed to the market despite persistent uncertainty should give confidence to those working to create Iran's next Digikala or Café Bazaar.
Photo Credit: Digikala
Iranian-Made Exoskeleton Highlights Potential for Hardware Start-Ups
◢ A new crop of entrepreneurs are making Iran into a hub for hardware development, drawing on the country’s deep pool of mechanical and electrical engineering talent.
◢ One such company is Pedasys, which has designed and manufactured a lower-body exoskeleton to allow paraplegic or elderly individuals who are lower-limb disabled to walk. The company is backed by Shenasa, the venture fund of Pasargad Financial Group.
A new crop of entrepreneurs are making Iran a hub for hardware development, drawing on the country’s deep pool of mechanical and electrical engineering talent.
Iran’s burgeoning startup ecosystem has enjoyed extensive international attention over the last few years, but the focus has remained almost exclusively on app developers and software creators. Behind the scenes, a crop of inventors and engineers have been launching new companies that seek to bring “made in Iran” into the 21st century.
One such company is Pedasys, which was founded in 2013 by a group of researchers from Tehran University, Sharif University of Technology, and Tarbiat Modares University. In 2015, the group was accepted into SATI, Sharif University’s prestigious technology incubator.
The company has designed and manufactured a lower-body exoskeleton called Exoped, which is currently being trialled in clinical settings around Iran. The robotics in Exoped allow paraplegic or elderly individuals who are lower-limb disabled to walk, helping these individuals break free of the limitations of wheelchairs.
There are just a handful of companies worldwide that have developed such technology, but Iran may prove an ideal environment. In addition to engineering expertise, Iran boasts an advanced healthcare system. From the standpoint of social impact, Exoped can make a meaningful difference in the lives of Iranians living with spinal cord injuries, including the elderly, those injured in natural disasters such as earthquakes, war veterans, and those suffering from musculoskeletal degenerative diseases. One 2015 study on the prevalence of spinal cord injuries in Iran estimates the figure at 320 per million individuals. But the researchers note that this is likely an significant underestimation.
A sense of social responsibility is a key motivation for Mostafa Naghipour and his fellow Pedasys co-founders. After nearly a decade of collaboration in robotics research, the team decided to establish a company to bring a new exoskeleton solution to the market. They secured seed capital from Shenasa, the venture capital arm of the Pasargad Financial Group. Shenasa has focused on hardware companies as it builds out its portfolio, which includes a company developing a 3D-printer for industrial applications and a start-up developing new technologies for cochlear implants.
To date, foreign investment in Iran’s start-up ecosystem has focused almost exclusively on software. With lower capital requirements, shorter research and development timeframes, and scale-driven business plans, software can seem a safer bet for foreign investors. But Naghipour believes that while hardware development is more difficult, the business potential with hardware is often greater. He notes, “investing in hardware can create businesses with protected market share and export potential. While it is unlikely that international markets would adopt Iran’s clones of already popular apps, Iran can create hardware technologies that are competitive globally on pricepoint and core capabilities.”
Naghipour believes that Pedasys’ addressable market in the Middle East is six million individuals. For this market, an Iranian product will have an inherent cost advantage. Pedasys’s creators expect their technology to be up to fifty percent less expensive than comparable American, European, or Japanese technologies, without compromising on functionality.
Moreover, as Naghipour explains, the cost of treatment isn’t limited to the cost of the exoskeleton. He notes, “patients require as many as twenty clinical sessions to customize the exoskeleton for their use and to teach them how to operate it effectively. Being able to provide this clinical care is a crucial part of the offering and is almost as important as the technology itself.”
The clinical approach is being refined in Iran to meet local needs. “Four medical centers have purchased their own Exoped unit for research purposes, and we are about to begin the application process for approval by the Iranian Food and Drug Administration,” says Naghipour. The approval process will take about one year. With the FDA approval in hand, Naghipour plans to “begin negotiating with insurance companies to get Exoped covered. We hope to demonstrate to insurance companies that the overall improvements to quality of life are worth their coverage.”
Importantly, applications for Exoped extend beyond rehabilitation. Similar solutions are now being tested by industrial companies worldwide as a means to improve comfort and reduce the risk of injuries for manufacturing workers. Exoped could find a large market in Iran’s automotive manufacturing sector, where chronic lower back pain is a major occupational health issue on assembly lines. Iranian workers who suffer from lower back pain self-report considerably lower overall quality of life scores.
To achieve these ambitions, Pedasys will seek to raise its Series A funding from both domestic and foreign backers. Although the company declined to disclose its fundraising target, Naghipour assures that is it “significantly lower than what Western companies are seeking to raise even before they have a working prototype. In Iran we do much more with much less and we think investors can see that.”
Photo Credit: Bourse & Bazaar
Iranian Protests And The Working Class
◢ There is growing consensus that the core constituency of the recent wave of protests in Iran is working class youth who feel "forgotten" in the country's economic plan.
◢ The expected post-sanctions windfall has yet to materialize and the Rouhani administration will need to decide whether it will compromise on its austerity-type budgets in order to offer some near-term economic relief.
This article was originally published in Lobelog.
In February of 2017, I wrote about Iran’s “forgotten man,” the member of the working class who seemed invisible in the talk of the country’s post-sanctions recovery:
What has been lost is an appreciation that the “normalization” of relations between Iran and the international community is as much about elevating “normal Iranians” into a global consciousness, as it is about matters of international commercial, financial, and legal integration. While there has been progress in building awareness of Iran’s young and highly educated elite, whose start-ups and entrepreneurial verve play into the inherent coverage biases of the international media, a larger swath of society remains ignored. By a similar token, the rise of the “Iranian consumer” with untapped purchasing power and Western tastes has been much heralded, but the reporting fails to appreciate that Iran’s upper-middle class rests upon a much larger base whose primary economic function is not consumption, but rather production.
With the new wave of protests sweeping Iran, it seems that the country’s forgotten men and women may be mobilizing to ensure their voices are heard in Iran and around the world. There is a growing consensus that the protests are comprised primarily of members of the working class, who are most vulnerable to chronic unemployment and a rises in the cost of living.
The idea that these are working class protests has explanatory power. First, if the protests are indeed a working-class mobilization, then they are less surprising, and can be seen as akin to the regular “bread riots” that took place during Ahmadinejad’s second term, when Iran’s economy suffered its sharpest contractions.
Second, a working class outlook may explain why the political slogans and imagery of the Green Movement have not been deployed by the protestors. The Green Movement was a predominately middle class movement focused on civil rights, which emerged in response to a chosen candidate being fraudulently denied an election victory. Solidarity with lower class voters was limited and economic grievances were not a central focus.
Third, such a demographic composition may explain the support conservative political groups in Iran have given to the protestors, despite the spectacle and soundtrack of anti-state slogans that have marked many of the gatherings. Conservative politicians are being careful not to alienate members of their base, while trying to cast the protests the predictable outcome of Rouhani’s economic policies. Moreover, a working class composition of the protests can explain how exactly Iran witnessed a successful presidential election with historic turnout and a clear victor just six months before mass mobilizations in cities across the country to protest the government. It may be that those turning to protest now feel their voice was not heard in the May elections.
A simple comparative review of upper-middle income countries such as Iran—including Brazil, Mexico, Thailand, and Russia, among others—demonstrates that while protests end with political expressions, they usually begin with economic motivations. That Iran’s working classes are ready to mobilize, and that the mobilization was so quick, makes sense within the context of Iran’s current economic malaise.
It is generally overlooked when discussing Iran’s post-sanctions economy that Rouhani has operated an austerity budget since his election in 2013. Some even describe his policies as “neoliberal.” While an imperfect descriptor, his administration’s economic approach does broadly correspond to the neoliberal “Washington consensus,” which seeks economic reform through trade liberalization, privatization, tax reform, and limited public spending, focus on foreign direct investment, among other policies.
Such an economic approach is in many ways understandable. Rouhani is seeking to correct the populist excesses of the Ahmadinejad administration while also addressing longstanding structural issues in Iran’s economy such as its overextended welfare system, a reliance on state-owned enterprise, and cronyism and corruption. But these are, by dint of difficulty, long-term reform projects, which may not fully cohere until after Rouhani’s tenure has ended. In a way, it is laudable that the administration is applying such an outlook for the benefit of what Homa Katouzian has called a “short-term society.” But the near-term political costs are becoming clear.
Rouhani’s budget is ultimately ill-suited to addressing the economic imperative of job creation, which is urgent and at the heart of popular dissatisfaction. As economist Djavad Salehi-Esfahani has written in response to Rouhani’s most recent budget:
One of the main stated goals of this budget is to create jobs, but it is hard to see how it can do that by slashing the development budget at a time that interest rates are very high (they exceed inflation by 5 percentage points or more). The unemployment rate has been rising in the five years that Rouhani has been in office, mainly because of increased supply pressure, but low demand has been an equal culprit. With unfavorable news about the future of the nuclear deal and the removal of sanctions, thanks to the 180-degree turn in US policy toward Iran, the prospects for a foreign-investment driven recovery are dim. With public patience running low, the debates in the parliament over this budget should be more serious than the usual haggling over the needs of special interests.
Most governments in Rouhani’s position pursue expansionary monetary policy and boost public spending to try to drive investment and economic growth. But Iran faces a series of economic challenges that complicate such a response. For example, the principle economic achievement of the Rouhani administration has been to bring inflation under control. The International Monetary Fund expects inflation to sit below 10% this year, down from 40% in 2013. Controlling inflation is critical to bringing stability to prices in Iran’s basket of goods, where other market forces continue to drive up prices. Any attempt to pump money into Iran’s economy to spur investment risks undermining the success on inflation.
Additionally, in the face of low-growth, central banks commonly lower interest rates to make it cheaper to finance new investment. But Iran’s interest rates are being slowly rolled back from a high of 22% to the present level of 18%. Slow adjustments are necessary due to Iran’s banks being overleveraged. Reducing the interest rate too drastically, especially as inflation remains stubborn, would have two effects. First, savers would see their deposits lose value. This would predominately hurt lower-income savers who have a less diversified range of assets. Members of the middle class still benefit from asset appreciation in still robust categories like real estate, stocks, or even gold. Middle class fortunes have improved somewhat following the nuclear deal for this reason. On the contrary, members of the working class rely on interest-bearing deposits accounts to conserve wealth and are therefore very vulnerable to fluctuations in interest rates. The controversy over the unsustainable interest rates offered by unlicensed savings and loan institutions, which spurred protests in cities across Iran in the summer 2017, is indicative of the vulnerability.
Second, a lower interest rate would threaten the financial wellbeing of many of Iran’s banks, which have long skirted reserve ratios and amassed toxic debt. Any attendant drop in deposits would make it even harder for banks to shore up their reserves, making politically fraught recapitalization by the central bank more likely. In the recent assessment of Parviz Aghili, CEO of Iran’s Middle East Bank, it would cost as much as $200 billion to bring Iran’s $700 billion balance sheet in compliance with Basel III standards, which call for a minimum leverage ratio of 6%. By comparison, Rouhani’s total budget for the next Iranian calendar year is $104 billion.
In the face of limited options, the Rouhani administration believed that post-sanctions trade and investment, made possible by the sanctions relief afforded under the Iran nuclear deal, would enable the country to kick-start growth and investment that supports job creation. But the economic dividend of the nuclear deal has not materialized as anticipated. The majority of business leaders believe that this is primarily due to external factors, namely President Trump’s threats to re-impose sanctions on Iran, rather than Iran’s own challenging business environment. The nuclear deal has been so central to Rouhani’s economic plan, with the nuclear deal and investment deals basically conflated in much of the discourse, that the concern around the future of the nuclear deal has also hit confidence in Rouhani’s economic management at large.
Overall, Rouhani is running an austerity budget because he is between a rock and a hard place. The policies he is adopting are economically sensible and necessary—so much so that the budgets have been passed despite pushback from parliament and other corners of the Iranian power structure as to the approach, neoliberal or not. But the policies are politically costly, testing the patience of a people who feel that the hopes for a better livelihood slipping away as the years pass. As Mohammad Ali Shabani writes, the circumstances in Iran can be described by the concept of the J-curve, which posits that mobilizations occur “when a long period of rising expectations and gratifications is followed by a period during which gratifications … suddenly drop off while expectations … continue to rise.”
We cannot fault Iranians for their rising expectations, for they are a people who know their immense potential. This is especially true of the working classes, who have built Iran’s diversified economy with their labor and the country’s rich culture with their values. As Iran has grown richer and more advanced, the burgeoning middle class has come to represent the future. But the recent experiences of wealthier economies offer a cautionary tale about “forgetting” the working classes, and sacrificing their expectations to protect the gratification of others.
Photo Credit: IKCO
Australia's MRC to Spend $2.4 Million on Further Iran Mining Exploration in 2018
◢ Mineral Commodities Limited, a listed Australian junior mining company, has entered the Iranian market. MRC has signed agreements that give it rights to majority stakes in two mining projects producing gold and copper in the northwest of Iran.
◢ The company has reviewed thirty projects so far, and has earmarked a USD 2.4 million dollars for further exploration in 2018.
Mineral Commodities Limited (MRC), a listed Australian junior mining company, has entered the Iranian market, announcing a series of acquisitions and exploration joint-ventures with an eye to the country’s rich copper, gold, cobalt, and lithium deposits.
In July 2017, MRC established a wholly-owned Iranian subsidiary, Madan Rahjo Kanyab Company. Bahman Rashidi has been appointed country manager and oversees a team based in Tehran.
MRC, which has experience developing projects in Australia and South Africa, is based in Western Australia and is led by brothers Mark and Jospeh Caruso. The company has moved aggressively into the Iranian market with rollout beginning just this year. In a statement, Mark Caruso, the company’s Executive Chairman highlighted Iran’s position as a “a world class geological and mining jurisdiction” which makes the market attractive “despite global rhetoric and uncertainty surrounding the lifting of sanctions in Iran.” For MRC, it was important to establish “a first-mover advantage” which has been met with “the willingness of the Iranian Government to support and reinvigorate investment in the mining sector.”
So far, the company has reviewed thirty potential “greenfield” and “brownfield” projects, and has so far executed two deals. The first deal is for Tuzlar, a gold and copper mine near Zanjan, in which MRC will exercise the option to acquire a 73.5% interest via its local subsidiary. Initially, MRC will make a USD 680,000 investment to acquire a 22.8% stake in the mine’s owner, Tuzlar Gold Mining and Industry Company, with an option to acquire the remaining 50.7% at a price of USD 2.5 million upon further study. Tulzar was one of the deposits first discovered by Anglo American when the global mining giant was exploring the Iranian market nine years ago, prior to the imposition of international sanctions.
MRC’s second deal is for Asbkhan, a copper and gold project located near Tabriz, in which MRC has the right to build a 75% stake in a special purpose vehicle established to develop and operate the mine. The company plans to spend USD 500,000 on further exploration and development work to earn its majority stake in the project pursuant to its recently concluded agreement.
MRC will fund further explorations of the local market from its operational cashflow and has earmarked USD 2.4 million for exploration budget for next year. The company has signed MOUs with the Geological Survey of Iran and Iran Minerals Production & Supply Company (IMPASCO) in order to furnish the data and site-access necessary to conduct further studies.
Iran’s geological resources have been long coveted in the global mining sector, and metallic and mineral deposits rival the country’s oil and gas reserves for overall economic value. Iran boasts 7% of the world’s total proven reserves of metallic and non-metallic deposits, according to BMI Research, a market research firm. World-leading reserves of zinc, copper, and iron ore remain largely unexploited.
Any mining company seeking to develop and operate mines in Iran will need to work with IMIDRO, the state-owned conglomerate that oversees the largely underdeveloped sector. Deputy Minister Mehdi Karbasian, who is Chairman of IMIDRO, has stated that Iran is seeking to attract USD $50 billion in investment in the mining and minerals sector by 2022. A key strategy to achieve this goal is to support privatization in the industry, which many foreign investors consider a precondition.
The government's ambitious investment target is somewhat mismatched with the fragmented nature of the sector. Most mining in Iran is still conducted at an “artisanal” scale, with local miners extracting from small concessions using limited machinery.
This circumstance, and the absence of the mining giants, offers junior mining companies an opportunity to enter the market and consolidate projects of surprising value. But consolidation at this scale is unlikely to lead to the scale of investment sought in the government's new five-year economic development plan. IMIDRO has been courting the major mining and commodities firms, including Rio Tinto and Glencore, but political risks have largely dissuaded investment thus far. In the meantime, as MRC's market entry demonstrates, it will be the smaller mining firms making the big moves in Iran.
Photo Credit: Wikicommons
Unilever and Golestan Strike New Joint Venture As Iran’s FMCG Market Accelerates
◢ Unilever has entered into a new joint venture with Iran's Golestan Company. The partners will develop and manufacture new food brands and product lines for the Iranian market.
◢ The decision to enter into a joint venture reflects a rising trend among international FMCG companies active in Iran. A combination of political circumstances, commercial drivers, and consumer preferences have encouraged ownership of local manufacturing interests.
Unilever, acting through its Iranian subsidiary, has signed a joint venture partnership with Golestan Company, the makers of Golestan tea and one of Iran’s best known consumer goods companies. The agreement was signed on November 29, but was formally announced this week.
The new partnership will see Unilever and Golestan join forces to locally manufacture and sell food products in Iran. The company’s announcement emphasizes that “the new joint venture company will develop, manufacture, market and sell new brands and line of food products in Iran.” This suggests that more than simply an agreement to locally produce brands from the Unilever stable in Iran, the companies will create new offerings that best suit Iranian tastes.
Özgür Kölükfakı, General Manager for Unilever in Iran, Central Asia, and the Caucuses, noted Golestan’s “local manufacturing and distribution capabilities” as the basis for a partnership that “strengthens [Unilever’s] contribution to Iran.” The announcement did not include details as to the amount of new investment earmarked for the joint venture company.
Though it has diversified into other foods, Golestan Company is best known for its eponymous tea. The ubiquity of Golestan tea in Iran reflects the company's early innovation in distribution and marketing. Golestan was one of the first Iranian FMCG companies to bring distribution in house, allowing greater end-to-end control of the supply chain, with an impact on everything from pricing to brand positioning on store shelves.
Unilever’s commitment to Iran has intensified since 2016, when global CEO Paul Polman made a visit to the country to meet with the expanding local team. Unilever sees Iran as an battleground as it competes in detergents and personal care with the likes of German Henkel and the American Procter & Gamble, and in food and beverage with the likes of Swiss Nestle and French Danone.
That Unilever will now operate not just its local representative office in Unilever Iran, but also a full manufacturing joint venture, reflects a trend among FMCG multinationals working in the country. While Unilever has owned a production facility in Qazvin since 2003, most FMCG companies have typically partnered with Iranian companies within licensing or contract manufacturing models, which saw globally recognized brands produced in Iran but without direct ownership or operation by the international partner, who would instead receive revenues in the form of a fee. This approach exposed multinationals to less risk, but also limited their ability to create value in the Iranian market.
Since the lifting of international sanctions on Iran in 2015, several forces have combined to further push companies towards joint venture partnerships or outright control of their Iran-based manufacturing interests. Not only has the Iranian and regional market matured in the two decades since many international brands began to be locally produced in Iran, offering greater opportunities at scale, but improvements in foreign investment protection and greater political comfort with foreign-owned local enterprise, have made joint ventures more appealing for international firms. This trend has led to new ownership-centered partnerships in the automotive, steel, pharmaceutical, and FMCG sectors, among others.
Consumer preferences have also driven the shift in strategy. Data from market research firm IranPoll indicates that 55% of Iranians believe that European products sold in Iran are “mostly counterfeit.” Iranian consumers still have a strong affinity for local brands, in part because nearly half of Iranians believe that European companies “do not have a good understanding of the needs and the taste of the Iranian people.”
To address these concerns and build local trust, multinational companies need to become more deeply engaged in the Iranian market. A significant 58% of Iranian consumers believe that “opening an official representative office in Iran will increase confidence in the quality of European producers’ products in the Iranian market.” In this context, Unilever’s move to establish a local joint venture with a trusted Iranian partner, and to focus on the development of new product lines tailored to local tastes is a smart response to consumer demands.
Today, in the Iranian FMCG market, the likes of Danone, Groupe Bell, Nestle, and Henkel are either operating with or actively exploring the potential for direct ownership of their local manufacturing interests. The most advanced company in this regard is Henkel, which brought out its Iranian shareholders in 2016 to convert its extensive manufacturing joint venture into a fully-owned subsidiary.
The determination with which FMCG multinationals are investing in the Iranian market is bearing fruits for Iranian consumers. The availability of consumer goods is one of the few areas where Iranians have seen improvements first-hand since the nuclear deal was implemented two years ago. In a recent survey conducted by Bourse & Bazaar in partnership with IranPoll, 43% of Iranian consumers have noted an increase in the “availability of goods made by multinational companies” for sale in Iran.
Said Ahmad Nasiripour, Managing Director of Golestan, relayed his hope that new partnership with Unilever points to a “much brighter future” for the company and its consumers. Expectations will certainly be high.
Photo Credit: Unilever
Autoneum Deal Underscores Huge Potential in Iranian Auto Parts Industry
◢ Swiss auto parts company Autoneum has entered into a new license agreement with Ayegh Khodro Toos to manufacture components for a new locally-produced Peugeot SUV beginning in 2019.
◢ The deal points to the potential in Iran's auto parts sector, where private sector companies, which are often SMEs with specific areas of expertise, dominate. Projections suggest exports of Iranian auto parts could rise to USD 6 billion by 2025.
Switzerland’s Autoneum, a world leader in the acoustic and thermal insulation for automotive applications, has signed a new exclusive license agreement with Ayegh Khodro Toos (AKT), an Iranian auto parts company that specializes in noise and vibration damping materials.
Autoneum and AKT will establish a new production like at AKT’s facility in Mashhad in order to begin producing carpet systems and dashboard parts. The first parts will come off the production line in 2019. According to company materials, AKT employs 95 technicians and controls 75% of the market for automotive insulation.
These parts will support the production of a new "SUV" by IKAP, the joint venture between Iran Khodro and Groupe PSA. The unnamed vehicle is most likely the Peugeot 3008, for which imports to Iran of complete vehicles will begin in early 2018.
Commenting on the new agreement, Martin Hirzel, CEO of Autoneum, highlighted Iran’s potential as “a central automotive hub for the Middle East, Far East and the Caucasus region.” Hirzel sees “strong sales potential” as the company seeks to meet the needs of customers in this regional market.
The new licensing agreement follows a common model in the Iranian auto parts industry, in which a foreign company brings technology and manufacturing specifications to a local partner, in order to supply the Iranian joint-ventures or CKD contract manufacturing agreements of the likes of PSA Groupe, Renault-Nissan, and Daimler. These parts are the lifeblood of a burgeoning Iranian automotive sector, which produced over 600,000 vehicles in the first half of 2017, registering 18% year-on-year growth.
The Iranian Auto Parts Manufacturers Association (IAPMA) estimates that there are 1200 parts manufacturers in the country generating USD 8 billion in annual sales. IAPMA ambitiously projects that Iranian auto parts market could generates sales of USD 32 billion by 2025. A major contributor of growth will be an expansion in exports, which are currently less than USD 200 million, but are expected to rise to USD 6 billion by 2025, a thirty-fold increase.
Major Iranian auto parts manufacturers such as Ezam and Crouse manufacture under license for global players such as Bosch, Mahle, Mando, and Valeo. The new agreement between AKT and Autoneum shows the potential for smaller, specialist parts manufacturers to strike similar deals that improve the quality and sophistication of the parts available for the local market and for export.
Photo Credit: Autoneum
American Medical Company Second Sight Enters Iranian Market
◢ Second Sight has entered the Iranian market with two procedures in Shiraz. Patients were implanted with the Argus II system, which provides an artificial form of useful vision to those suffering from degenerative loss of sight.
◢ The company entered into a partnership with Iranian firm Arshia Gostar Darman in 2016 and holds a license from the U.S. Department of Treasury that permits the sale of its devices Iran.
Second Sight, a publicly-listed American company which develops and manufacturers visual prosthetics, has announced its market entry into Iran with two landmark procedures. Two patients in Shiraz suffering from Retinis Pigmentosa, a category of genetic disorder which leads to the degeneration of cells in the retina, have had their sight partially restored with the implantation of the company’s Argus II device.
The milestone procedures were carried out last month at Shiraz Pars Hospital and the Khalili Hospital of the Shiraz Medical Science University. The devices were successfully implanted by Professor Mohsen Farvardin and his team. The Argus II system uses a small video camera mounted to a patient’s glasses to send images to a small patient-worn video processing unit. This small computer then processes the images and sends corresponding visual instructions to an antenna in the retinal implant. The implant emits small pulses of electricity to the stimulate the remaining photoreceptors in the retina, allowing the patient to perceive visual patterns.
The procedures were facilitated by Second Sight’s exclusive local distribution partner, Arshia Gostar Darman Company, an established supplier of sound processors and cochlear implants that help remediate hearing loss. Second Sight and Arshia Gostar Darman entered into a partnership in July 2016, at which time Second Sight had received a specific license from the U.S. Office of Foreign Asset Control (OFAC) to permit the sale of the company's medical devices in Iran.
Second Sight’s market-entry announcement came just one day after the U.S. Department of Treasury levied a USD 1.2 million fine on another American medical company, Dentsply Sirona. US regulators found that between 2009-2012, Dentsply made 37 shipments of dental equipment and supplies to Iran via its international subsidiaries. Company personnel concealed the fact that the goods were destined for Iran. In its public notice, OFAC indicated that products sold by Dentsply “were likely eligible for a specific license.”
The divergent experiences of Second Sight and Dentsply point to persistent challenges for specialist American medical companies that wish to supply the Iranian market. These companies, though smaller than the global behemoths such as Merck or Johnson & Johnson, play a vital role in the healthcare sector as they bring advanced therapies and innovative devices to market. While U.S. licensing policy is generally accommodating of the sales of medicines and medical equipment to Iran on humanitarian grounds, the regulatory burden and legal costs for these companies can be inhibitive. Securing an OFAC license is nearly always necessary in order to operate in a compliant manner.
At a time when the prospects for renewed American trade with Iran have dimmed, Second Sight's recent success offers a welcome reminder of the opportunities that persist in the pharmaceutial and healthcare sector.
Photo Credit: Second Sight
Senior American Diplomat To Be Replaced With "Trump Loyalist" in Key Iran Role
◢ Chris Backemeyer, Deputy Assistant Secretary for Iranian Affairs at the U.S. Department of State, is set to be replaced by Andrew Peek, a political appointee described as a "Trump loyalist."
◢ Backemeyer had a decade of experience working on the Iran file. His replacement represents the most significant loss of expertise on Iran policy to date.
As first reported in Foreign Policy, American career diplomat Chris Backemeyer, the Deputy Assistant Secretary for Iranian Affairs, is to be moved to a new role within the State Department’s Bureau of Near Eastern Affairs. Backemeyer will be replaced by Andrew L. Peek, a former intelligence officer in the U.S. Army with no prior diplomatic experience. Peek previously served Republican senators as a foreign policy advisor and has been described as a “Trump loyalist.”
The news comes as the Joint Commission is set to meet in Vienna this week to discuss the implementation of the Joint Comprehensive Plan of Action (JCPOA).
Backemeyer's move marks the year’s fourth and perhaps most significant change to the wider team overseeing Iran policy at the department. In January, Jarrett Blanc, who served as Deputy Lead Negotiator for Iran Nuclear Implementation, left the State Department (as is customary follow for political appointees following a change in administration) taking up a position as a Senior Fellow at the Carnegie Endowment for International Peace. In April Sahar Nowrouzzadeh, a career civil servant, was removed from the State Department's’ Policy Planning Team largely due to attacks from conservative media outlets focusing on her role in helping to craft the Obama administration’s Iran policy. In August, Ambassador Stephen Mull, a career diplomat, left the position of Lead Coordinator for Iran Nuclear Implementation to take up a fellowship at Georgetown University. He remains with the department.
Backemeyer’s reassignment stands out because of his direct involvement in the Joint Commission of the Joint Comprehensive Plan of Action and his decade of experience on Iran. Backemeyer has worked on the Iran file since 2007, rising to the role of Deputy Director of the Office of Sanctions Policy and Implementation before serving as Director for Iran on the National Security Council in the Obama White House.
The American delegation to the Joint Commission meeting next week will still be led by Tom Shannon, the Under Secretary for Political Affairs, who lacks Backemeyer’s specialist knowledge of Iran sanctions or the complex political issues surrounding the implementation of the JCPOA. While, Backemeyer is currently on paternity leave and was not scheduled to attend the upcoming Joint Commission meeting, the loss of his expertise will no doubt raise concerns among his Joint Commission peers, especially as the future of the JCPOA remains in doubt following Trump’s decertification of the deal in October.
The personnel change will also prove troubling to multinational companies pursuing trade and investment opportunities with Iran. Backemeyer spearheaded the Obama administration’s public outreach to companies and financial institutions following the lifting of U.S. secondary sanctions on Iran. This outreach was supported by a small team of “Iran watchers” stationed at several key embassies including London, Paris, and Berlin, as well as the Iran Regional Presence Office in Dubai.
While this outreach ceased following Trump’s inauguration, that Backemeyer and his team had remained in their positions gave business leaders some reassurance that American diplomats were at least aware and understanding of their frustrations with sanctions policy, even if solutions were not always forthcoming.
It remains to be seen whether new appointee Peek will make any similar effort to listen to the policymakers and business leaders who remain committed to constructive diplomacy and commercial engagement with Iran. Peek described the JCPOA as "America's diplomatic disaster" in a November 2013 column and wrote in March 2015 that the "core problem" with the nuclear deal "is that lifting the sanctions hamstrings US efforts to prevent the largest and strongest power in the Middle East from dominating the Middle East." Clearly, the early signs are less than promising.
Photo Credit: Politico
Rentierism and Rivalry Between Riyadh and Tehran
◢ Though widely described as move to consolidate political power, Crown Prince Mohammad bin Salman's decision to arrest members of the Saudi elite points to anxiety about Saudi Arabia's economic prospects and the risks of rentierism.
◢ The rivalry between Saudi Arabia and Iran is driven by the fact that the Kingdom is increasingly economically vulnerable at a time when Iran's fortunes are set to improve.
This article was originally published in LobeLog.
In response to the rivalry between Saudi Arabia and Iran, the United States has long pursued a strategy of counterbalancing, extending its security umbrella to cover the kingdom and the GCC states. But as promises of security fade in the face of decreasing belief in the American commitment, infighting in the GCC, and the advent of Saudi military adventurism, security is no longer a sufficient paradigm for policy that seeks to temper an intensifying regional rivalry.
In Saudi Arabia, a young Crown Prince, Mohammad bin Salman (MbS), is poised to rule a country that—on its current trajectory—faces a sustained economic decline as oil revenues shrink and the population grows. By contrast, having demonstrated considerable economic resilience under sanctions and significantly reduced its dependence on oil rents, Iran may finally be poised to achieve sustained growth.
This divergence in fortunes is at the heart of the regional conflict. Should MbS wish to prevent Iranian domination of the region, he will need to secure Saudi Arabia’s economic future and redefine the contribution of economic rents to state power—a puzzle of political economy. In the absence of any robust solution, he will resort, as most rulers do, to externalizing the political instability that will no doubt threaten him within the kingdom’s borders (see Vladimir Putin). The cynical war in Yemen gives an early indication of how such weakness may tragically precipitate further regional conflict.
The power differential between Saudi Arabia and Iran reflects the degree to which the kingdom remains a rentier state and the degree to which the Islamic Republic does not. In the assessment of political scientist Michael Herb, between 1972-1999, the “degree of rentierism” in Saudi Arabia was 80% while in Iran it was just 55%. To the extent that rentierism is understood as a fundamental liability in a country’s long-term political and economic stability, any intervention to temper the rivalry between Saudi Arabia and Iran will need to contend with the fundamental configuration of Saudi political economy, enabling moderation through strength.
Blurry Vision
MbS’s dramatic move to arrest scores of Saudi elites, including Minister of the National Guard Prince Mutaib bin Abdallah and the billionaire chairman of Kingdom Holdings Prince Alwaleed bin Talal, has been widely described as a “purge” or “soft coup.”
But as as executive director of the Arabia Foundation Ali Shihabi has argued, the arrests had little impact on MbS’s political fortunes. He writes, “In actuality, Saudi Arabia completed its political transition last June when King Salman replaced MBN with MBS as heir to the throne.” To this end, it is “wrong to interpret last weekend’s arrests as an action that materially increases the political risk to the monarchy.” Rather, Shihabi suggests that MBS intended to send a message “to political and economic elites that their entitlement to extreme wealth and privilege, and their impunity, is coming to an end.”
The economic consequences of the arrests could be significant. According to a statement on the arrests from the Saudi attorney general, “at least USD $100 billion has been misused through systematic corruption and embezzlement over several decades.” Shihabi believes that MbS will seek the “recovery of substantial ill-gotten assets from many members of the elite” as part of his effort to correct for perceived abuses.
It is tempting to think, in accordance with MbS’s deliberate self-marketing as an earnest reformer, that the move against corruption is an expression of political strength. This may be true within the internal dynamics of the Saudi Royal family—no doubt his moves against family members were bold. But when viewed within the wider economic context, the need to vilify quasi-state appropriation of wealth in the kingdom speaks to a brewing economic crisis and an acute sense of weakness.
In July, the IMF revised down projections for Saudi GDP growth in 2017 to just 0.1%, with growth for 2018 projected at a paltry 1.1%. In the face of low oil prices and general underperformance, the Saudi economy is teetering on the edge of a recession for the first time since 2010. The overall value of the economy has fallen by over $100 billion in just three years.
Saudi Arabia remains a rich country. But a dwindling cash pile (down nearly $300 billion from the 2014 high) and the first indications of oil’s impending decline as a source of rents have triggered a time-bomb for MbS. The county’s population is ballooning, with the working age population set to grow by 6 million in a country with just 41% workforce participation. MbS is poised to be the first king in Saudi history for whom oil rents will not meet the country’s economic needs or help consolidate his absolute rule.
The much touted Vision 2030 plan is an attempt to defuse this timebomb through an expansive set of economic and social reforms. In the near term, MbS is aiming to introduce an additional $100 billion annually from non-oil revenue by 2020. As described in a fawning profile in Bloomberg Businessweek, MbS “has already reduced massive subsidies for gasoline, electricity, and water. He may impose a value-added tax and levies on luxury goods and sugary drinks.”
But taxing soda is not going to replace declining oil revenues, and the likely impact of the proposed reforms are being oversold. At a more fundamental level, there are no plans to introduce an income tax, and in order to stave unrest from the least fortunate Saudis, cash handouts are still planned. As though to burnish his populist chops, MbS told Bloomberg, “We don’t want to exert any pressure on [the poor]. We want to exert pressure on wealthy people.”
The prince's turn to populism may be a novel chapter in the House of Saud’s playbook for regime survival, but it reflects a confused approach to reformation of a broken political economy. By failing to consider the importance of taxation, MbS seems unwilling to renege on what historian Toby Craig Jones calls the “devil’s bargain” of Saudi political economy, where “no taxation without representation” is perverted to “no representation without taxation.”
To date, the essential challenge of Saudi political economy remains unaddressed. So long as the country’s rulers depend on a dwindling natural resource or the fickle commitment of international investors to drive economic growth, the state will remain weak.
Lessons From Iran
Across the Persian Gulf, Iran’s leaders have made their own Faustian bargains concerning political economy, but the 1979 revolution provided a hard reset that addressed the central liability currently facing their Saudi rivals. The revolution served to give the government more levers by which to grapple with the chief risk that plagues rentier economies—income inequality. Iran’s present level of income inequality, as measured by the GINI coefficient, is just below 0.4. At the time of the Islamic Revolution, the level was 0.5.
According to a growing body of evidence, Iran’s combination of resource rents distribution with a progressive income tax has been fundamental to the country’s ability to mitigate inequality, especially given that Iran’s large population renders resource rents alone an insufficient source of government revenue for this purpose. In 2015, for the first time in over 50 years, tax revenues surpassed oil revenues as the primary source of government income.
A recent study by economists Mohammad Reza Farzanegan and Mohammad Mahdi Habibpour of resource rents distribution in Iran concludes that “any transfer policy that uses oil and gas rents which are publicly-owned and managed in Iran will decrease income inequality and poverty.” However, the authors find that “resource dividend” (RD) policies that combine the distribution of oil rents with income tax have the greatest effect at reducing income inequality. In a sample of 140,000 households, the so-called RD policies saw the GINI coefficient fall from 0.44 to 0.32 in rural areas, and 0.39 to 0.33 in urban areas—reductions in line with the overall improvements in Iranian income inequality since the Islamic Revolution.
President Hassan Rouhani continues to battle stubborn inequality, and the perception of misappropriation of rents through government corruption is a major source of political contention. In this sense, Rouhani’s own campaign of arrests, largely targeting elites connected to Iran’s Revolutionary Guard, mirrors the moves by MbS. But there is a crucial difference. Rouhani is trying to address corruption because he needs to better distribute rents, half of which originate from taxation, in lockstep with economic expansion. MbS is namechecking corruption because he needs to consolidate rents as he faces a economic stagnation—a position of relative weakness.
A Common Aim
In a lengthy interview with the influential Iranian foreign affairs magazine Diplomacy, former Iranian ambassador to Riyadh Hossein Sadeqi makes an emphatic case that MbS will avoid repeating the “Pahlavi scenario,” largely because of a deliberate effort to seek advice from “intellectual centers” including think tanks and consultancies. Sadeqi acknowledged that “Saudi Arabia has a single-product economy in which corruption exists,” but he also puts faith in the country’s capacity for reform, highlighting early progress instituting the Vision 2030 reforms, particularly in a social context.
This measured and hopeful assessment points to an important consideration for American policymakers. Shifting the emphasis in regional balancing away from military parity towards economic parity opens the door for a less confrontational dialogue between Saudi Arabia and Iran. The Iranian government has strong interests in Saudi Arabia’s economic stability. The international community should seek to ensure that a concerted program of training and technical assistance, rather than arms transfers to meet security demands, is made available to support MbS’s reform program.
Moreover, any program that seeks to address the residual challenges of rentierism could be a rare opportunity to bring senior Saudi and Iranian stakeholders around the same table to discuss how best to address destabilizing inequality and preserve standards of living in the post-oil world. The Iranian experience would be hugely instructive if Saudi leaders could be convinced to accept some well-intentioned advice.
Photo Credit: Wikicommons
Oil Giant Total Takes to Twitter to Underscore Iran Commitment
◢ In a series of tweets published on Tuesday, Total's press office pushed back on reports that the company is rethinking its Iran strategy in light of pressure from the United States.
◢ The tweets emphasize that Total CEO Patrick Pouyanné sees no political barriers to the South Pars gas deal, and is simply waiting to see whether following Congressional action legal conditions will allow the deal to move forward.
In an unusual move, Total's press office issued a series of tweets on Tuesday in order to correct an apparent mischaracterization of the company's position on its planned USD 4.8 billion gas deal in Iran.
A piece published by CNN Money on Tuesday, and later echoed by Reuters, suggested that Total was "rethinking" its comittment to Iran in light of the company's large presence in the U.S. and President Trump's opposition to the Iran deal. The piece centered on comments made to CNN Money on the sidelines of an energy conference in Abu Dhabi, with Total CEO Patrick Pouyanné stating that "If there is a sanctions regime [on Iran], we have to look at it carefully... We work in the U.S., we have assets in the U.S., we just acquired more assets in the U.S."
But a series of tweets from Total's official press office account have since sought to dispel the idea that there has been any change in the company's policy towards Iran. The tweets explain how the comments made by Pouyanné are consistent with those made in several interviews since Trump's de-certification of the JCPOA Iran Deal.
Total's response clarifies that the company remains committed to its project in Iran's South Pars gas field and draws attention to an earlier interview in which Pouyanné stated he does not see a political barrier to conducting business in Iran. That Total is continuing to push ahead on its Iranian project demonstrates considerable resolve, especially given the company's extensive operations in both the United States and Saudi Arabia, two countries whose governments largely oppose Iran's economic opening. Indeed, the company has recently moved to more directly manage political risks by opening an office in Washington.
Pouyanné's comments to CNN Money do however raise the possibility that the United States will reimpose secondary sanctions, which would penalize non-U.S. entities for conducting business with Iran. Such a "snapback" scenario would compel nearly all European multinational firms, including Total, to pull back from the market. Total, like many other companies, is simply waiting to see what legal approach Congress is likely to take. Pouyanné told CNN, "We are working on the project. We launched the tenders, we should award contracts by January... I hope by that time, Congress will have an answer for the president and the president will have to renew, or not [renew], the certification."
Encouragingly, it remains unlikely that Congress will opt for snapback, which would constitute withdrawal from the JCPOA. Total's landmark deal still seems poised to open a new era of energy investment in Iran.
Photo Credit: IRNA
Iran Starved of Investor Capital Needed to Fuel Extensive Privatizations
◢ Morteza Lotfi, the newly appointed head of SHASTA has recently announced a new effort for SHASTA to divest from a large portion of its portfolio, offering a second chance at the privatizations pursued a decade ago.
◢ But political barriers and a dearth of capital, particularly from foreign investors, risks rendering SHASTA's plan dead on arrival as Iran seeks to liberalize without crucial liquidity.
Iran’s long but troubled drive for privatization received a boost earlier this month. Morteza Lotfi, the recently appointed head of Iran’s Social Securities Investment Company (SHASTA), the country’s largest pension provider, announced that SHASTA would list the remaining 25% of its subsidiary companies not currently on the Tehran Stock Exchange. The move was intended to make the companies “more competitive and their financial status more transparent.”
A few weeks later, Lofti made a further announcement that SHASTA plans to sell its stake in 130 companies in a two stage process. An initial tranche of 40 companies has reportedly been prepared for this divestment. Taken together, the two announcements suggest a renewed push for privatization, taking enterprises out of the limbo of SHASTA’s quasi-state ownership in which they have largely languished.
While the market value of the proposed privatization was not given, SHASTA is known to have around 200 subsidiary companies and its holdings are cumulatively valued at USD 9 billion. On this basis, the 130 companies poised for sale could therefore have an estimated value of around USD 5.5 billion, with the caveat that the companies to be offloaded are likely the underperforming firms, with lower valuations than the portfolio average. Nonetheless, in terms of the number of companies and their likely market value, SHASTA’s move would be another historic step in Iran’s economic liberalization.
But there are reasons to doubt that SHASTA’s push for privatization will proceed as planned. SHASTA’s own holdings are a legacy of previous failures in Iran’s faltering drive to reduce state control of the economy. SHASTA’s portfolio of assets expanded most rapidly beginning 10 years ago, when privatization efforts overseen by the Ahmadinejad administration fell short in the face of political pressure, economic unpreparedness, and general mismanagement.
In the course of privatizations in this period, a staggeringly small percentage of the formerly state-owned assets actually passed into the true private sector. As Kevan Harris writes, citing a 2010 parliamentary commission report, “Out of seventy billion USD worth of assets of SOEs divested since 2006 only 13.5 percent of the shares had gone to the private sector.” The vast majority of assets were transferred to the control of "parastatals" and cooperatives such as SHASTA. Critics saw this privatization as merely a “relocation” of state-ownership.
Today, the political barriers to the proposed asset sale remain strong. SHASTA is the investment arm of the Social Securities Organization, which provides healthcare entitlements and pensions benefits for a large proportion of Iran’s middle and working-class members of the labor force. SHASTA’s financial returns are intended to cover the costs of these welfare benefits, and are therefore highly politicized. As Harris explains, “Pensioners would hardly accept a selloff of SHASTA’s investment portfolio to the private sector without major guarantees of future entitlements by the state.” The Rouhani administration has committed to reducing entitlements, but given that SHASTA provides a pension to nearly 40% of the Iranian population, any major change to its portfolio could be a flash-point for opposition.
Aside from the political barriers, SHASTA’s bold plan faces another major obstacle. Iran’s equities markets are insufficiently capitalized to facilitate the sale of the 130 companies at sufficiently high prices.The current market capitalization of the Tehran Stock Exchange is about USD 100 billion. Relative to the overall size of the market, a USD 5 billion divestment by SHASTA, already the market’s single largest shareholder, would be difficult to absorb by other investors, particularly investors outside the circle of bonyads and other quasi-state holding companies.
Some within Iran’s financial sector see Lotfi’s announcements as an empty gesture. As relayed by one financial executive in Tehran, who preferred to remain anonymous, “We are used to these kind of gestures from high new management of SHASTA. They need the money and everyone knows it. But they don’t have the guts to push the button when it’s time.”
The Rouhani administration is well aware of this structural barrier to privatization, and has hoped that in the course of the post-sanctions economic rebound, new injections of capital by foreign investors would boost privatization prospects by alleviating the liquidity problem. Recent developments such as the partnership between Italy’s Azimut and Iran’s Mofid Entekhab bode well for the role of foreign institutional asset managers in the TSE, but there remains a long way to go before Iran can witness the foreign capital fueled privatizations that helped rapidly liberalize the BRIC economies. While the overall number of foreign investors trading on the TSE rose following the lifting of international sanctions and although foreigner trading value has doubled in the last year, this progress is measured from a very low base.
By comparison, around 60% of shares on the Borsa Istanbul are owned by foreign investors. Acknowledging the important role foreign investors will need to play to see through the off-selling, Lotfi disclosed, “Talks are underway with the Turkish government for dual listing of some of [SHASTA’s] subsidiaries on Borsa Istanbul, which would be a positive step toward attracting foreign investment.”
SHASTA's intended move reflects the precise kind of privatization efforts that Western economic policymakers have long advocated in liberalizing markets. But unlike in other liberalization scenarios, Iran's economic actors find themselves hamstrung by structural challenges that few in the international community seem keen to address. As SHASTA looks to right the wrongs of past privatization efforts, a more concerted effort should be made to support inflows of foreign investment. If success in privatization is to be achieved this time around, Iran's equity market investors will need foreign investors to help carry the burden and unlock the opportunity.
Killing Iran’s Economy Won’t Help the U.S.
◢ The Trump administration's new Iran policy focuses largely on targeting the IRGC in the name of American national security. But IRGC will not stop its expansionism in the Middle East because of sanctions and sanctions will not weaken the Iranian government at home.
◢ If the Trump administration continues to harm Iran's economy, the biggest losers will be the Iranian people, caught between punitive U.S. policies and an illiberal regime.
The Trump administration has announced a set of seemingly aggressive policies against Iran, including decertifying the nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA). The thrust of the “new” U.S. policy on Iran appears to be the imposition of additional sanctions against organizations such as the Islamic Revolutionary Guards Corps (IRGC). Critics of the JCPOA claim that new sanctions will not only “fix” the JCPOA, but also help roll back Iran’s increasing influence in the Middle East. Both assumptions are wrong.
The JCPOA has been effective in constraining Iran’s nuclear program, a fact confirmed by the International Atomic Energy Agency and the other parties to the JCPOA, namely the United Kingdom, France, Germany, Russia, and China. The Trump administration’s actions not only risk undermining an effective agreement, but are unlikely to change Iran’s regional policies or weaken the Iranian regime at home. Iran’s economy is likely to be damaged by any new U.S. sanctions, with foreign investment having already slowed in response to Trump’s rhetoric. The biggest losers will not be the Iranian regime but the Iranian people, whose striving the U.S. has long hoped would bring about a less antagonistic Iran.
The IRGC is responsible for Iran’s impressive expansion across the Middle East. Iran is a primary power-broker in Iraq, Syria, and Lebanon; Tehran also wields substantial influence in Afghanistan and even in relatively far off countries such as Yemen. The IRGC is also a major economic player in Iran. So it may seem to make sense that sanctions against the IRGC would help curtail its power in the Middle East. Yet the opposite is true.
Money is not the IRGC’s only motivation in shaping Iran’s regional policies. Rather, a combination of revolutionary zeal, fear of external enemies, Iranian nationalism, and regional instability have also fueled the IRGC’s successes in the region. Yes, it does take substantial funding for Iran to expand its power. Tehran not only funds Hezbollah and the Assad regime in Syria, but a myriad of pro-Iranian groups in Iraq, Afghanistan, and Palestine. But Iran was able to expand its regional power even under the severest of sanctions imposed prior to JCPOA. The rise of the Islamic State and state collapse in places such as Syria have allowed Iran to exploit fear and instability to expand its power. The region’s Shi’a populations, while not always ideologically aligned with Iran, have little choice but to turn to Tehran for protection in the face of extremist Sunnis. Iran does not need billions of dollars to be powerful given the IRGC’s ability to mobilize historically disaffected Shi’a to their cause.
New U.S. sanctions are also likely to undermine President Hassan Rouhani’s attempts to liberalize the economy. Opponents of the JCPOA often claim that “moderates” such as Rouhani are indistinguishable in terms of goals and ideology from the IRGC. No one in Iran’s political establishment can be considered pro-American; yet to ignore or deny political realities in Iran does a disservice to American interests. Rouhani’s government was able to negotiate the JCPOA in spite of Supreme Leader Ayatollah Ali Khamenei’s deep suspicions. The Iranian president hoped that the sanctions relief promised by the JCPOA would help liberalize Iran’s economy and attract substantial foreign investment, decreasing Iran’s dependence on energy exports and potentially weakening the IRGC’s grip in key economic sectors.
To be sure, economic liberalization may enrich Rouhani’s faction and regime insiders largely opposed to American influence in the region; but millions of middle class Iranians who envision better U.S.-Iran relations will also benefit from privatization, foreign investment, and the attendant new job opportunities. U.S. sanctions against the IRGC, which could slow the process of liberalization, will ultimately punish all Iranians, including those who want better ties with Washington. Khamenei’s claims that America can never be trusted will appear increasingly as fact rather than mere political rhetoric. The Trump administration’s efforts to decertify Iran and undermine the JCPOA without justification will reinforce the Iranian public’s suspicions of U.S. intentions. This also would quiet any segment of the Iranian public that might object to Iran’s nuclear pursuits at high cost to the economy.
The IRGC will not stop its expansionism in the Middle East because of sanctions. And sanctions will not weaken the Iranian regime at home. Sanctions may have worked in building American leverage before the JCPOA. But, political conditions in Iran and America’s standing both in the Middle East and across the globe have changed considerably in the last few years. The U.S. is losing its credibility among the Iranian public and U.S. allies who helped negotiate the JCPOA. And Iran is more powerful in the Middle East than before, especially as international powers such as Russia, regional states such as Iraq, and even Turkey turn to Iran as the region’s decisive actor. The biggest losers will be the Iranian people, caught between punitive U.S. policies and a illiberal regime.
Photo Credit: Thomas Cristofoletti
Iran Sanctions Policy Increasingly Throttles Free Trade in Ideas
Since 1988, the Berman Amendment has limited the authority of the President to restrict the exchange of information as part of American sanctions policy. But the new sanctions designation of the IRGC and recent voluntary actions by American companies suggest that the long standing protection for the free trade of ideas is under threat.
This article was originally published in LobeLog.
In 1988, as legislators were creating the legal basis for the modern use of economic sanctions as a tool of American foreign policy, an important amendment was added to two laws, the Trading With the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA). The so-called Berman Amendment was devised to withdraw the president’s authority to use sanctions to prohibit the import or export of informational materials, whether directly or indirectly.
Former Representative Howard L. Berman (D-CA), who put forward the amendment, felt that support for access to information was a cornerstone of American foreign policy and should not be undermined by any program of economic sanctions. He stated: “The fact that we disapprove of the government of a particular country ought not to inhibit our dialog with the people who suffer under those governments…. We are strongest and most influential when we embody the freedoms to which others aspire.” In 1994, the provisions in the Berman Amendment were expanded in the Free Trade in Ideas Act in response to the fast changing media landscape. The definition of “informational materials” came to apply “regardless of format or medium of transmission” to “any information or informational materials.”
Since then, American sanctions policy has generally sought to ensure that the targeting of commercial and financial channels does not inhibit the transmission of information. This is perhaps best exemplified in the case of the sanctions regime levied on Iran, the most extensive ever devised. Even in the case of Iran, exemptions exist in the sanctions regulations for activities such as, publishing, journalism, Internet communications, and even organizing events. In addition, more specific permissions are granted in the form of so-called General Licenses issued by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). These include General License D-1, which permits the use of certain software or hardware for personal communications, and General Licence G, which licenses the export or import of educational services to and from Iran. Companies can also apply for specific licenses, which have been awarded to enable publishing, research, and communications activities that may be more commercial in nature, but are still consistent with the notion of “free trade in ideas.”
However, recent developments suggest that American regulators have lost sight of the absolute importance of protecting informational exchange. On October 13, the U.S. Treasury designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a “Specially Designated Global Terrorist” (SDGT) As several sanctions designations had already blocked the IRGC, the new action made little difference to the prohibitions around commercial and financial dealings with the Guards. But the push for a terrorism designation did have one new and substantive outcome.
In the FAQ note issued to clarify the new designation, OFAC explains that the new designation draws upon a counterterrorism authority, Executive Order 13224, which was not previously applied to the IRGC. As a result of this new authority, the IRGC “may not avail themselves of the so called ‘Berman exemptions’ under the International Emergency Economic Powers Act (IEEPA) relating to personal communication, humanitarian donations, information or informational materials, and travel.”
This represents one of the first instances in an Iran sanctions designation in which OFAC has specifically clarified that the provisions of the Berman Amendment do not apply. Sanctions experts are quick to point out that, despite the new designation, OFAC will necessarily prioritize enforcing possible illicit financial support for the IRGC above the possible transmission of information, which could be as innocuous as usage of social media platforms or distribution of news media. But if the loss of the exemptions is the only substantive legal consequence of the new designation, then the stakes are actually quite high. As sanctions attorney Clif Burns sharply observed in a blog post, “It is now a federal crime for a U.S. person to give a copy of The Bible to anyone in the IRGC.”
American policymakers may not harbor any sympathies for members of the IRGC, but the manner in which the designation affects informational exchange is emblematic of a general failure in US sanctions policy to adequately consider or protect the free trade in ideas with people and entities, even those on the opposing sides of an adversarial relationship. Beyond the nefarious IRGC, members of Iranian civil society also see their access to information increasingly restricted. In August, Iranian apps were removed from both Apple’s App Store and Google Play, causing an uproar among Iranian users. In September, the online-course platform Coursera began to limit a wider range of content for users based in Iranian, citing sanctions regulations.
For now, the likes of Apple, Google, and Coursera are making voluntary decisions to limit their service provision to Iranian users. But the moves were likely spurred by the marked shift in Iran policy between the Obama and Trump administrations. These companies may have changed their policies in accordance with a stricter interpretation of General License D-1, which had previously been used to justify providing Iranian users access to these online platforms. During the Obama years, the “spirit” of OFAC’s enforcement mandate was clear and informational exchange was in fact encouraged within the scope of exemptions and general licenses.
It may seem tenuous to link the IRGC’s new designation with the recent experiences of Iranian Internet users. But in both cases, the overall disposition of American sanctions policy has clearly moved away from the political and ethical intentions behind the Berman Amendment. Even if the impact on information flows is so far inadvertent and primarily reflective of voluntary actions by the companies operating informational platforms, OFAC could absolutely be doing more to provide comfort around the general permissibility of informational exchange.
The consequences of any reduced “trade in ideas” with Iran will be profound. The United States is limiting its means to influence decisionmaking within the IRGC at precisely the same moment that it is undermining the ability of Iranian civil society to freely access informational services. It is unclear how removing the Berman exemptions for the IRGC weakens the organization. If anything, it may make it harder for Iranian and foreign stakeholders to help influence key reforms that would help mitigate the IRGC’s political and economic might.
For example, with the new designation, a non-governmental organization with a so-called U.S. nexus (such as funding that originates in the United States, or U.S. nationals on the staff) can no longer seek to treat IRGC affiliates as subjects in any research or technical-assistance programs. This is particularly concerning as Iran’s government seeks to push forward with a program of economic liberalization and attempts to induce the IRGC to sell assets and reduce their economic footprint. The Rouhani government needs foreign assistance to cleave the IRGC from its role in the economy, but that assistance may now be prohibited if the informational materials in question are ultimately earmarked for IRGC affiliates.
In March of this year, American University in Beirut agreed to pay a penalty of $700,000 to settle claims in a civil suit brought by the United States. The penalty was tied in part to the provision of “material support” to Jihad al-Binaa, an organization linked to the SDGT-designated Hezbollah, on a university database “for the stated purpose of connecting Non-Governmental Organizations (“NGOs”) with students and others interested in assisting them.” The IRGC has a much wider range of affiliated entities than most organizations designated under counterterrorism authorities, including commercial entities, welfare organizations, and educational institutions. If even listing these entities in a database can be seen as tantamount to material support, warranting an enforcement action, then the SDGT designation could significantly reduce the scope for responsible dialogue with the IRGC, whether direct or indirect.
Considering the fundamental role that both government-backed and independent research and technical assistance programs played in fomenting political and economic liberalization in formerly embargoed countries such as the former Soviet Republics, China, and Vietnam, any policy that blocks informational exchange will deprive the United States of some of its best foreign-policy tools.
There are times when blocking economic relations is necessary. But there is no situation in which the total denial of the free trade of ideas is sensible. The Berman Amendment is much more than a quirk of sanctions policy. It is among the most lucid formulations of liberalism in American foreign policy. In devising its approach to Iran, the Trump administration would do well not to lose sight of how the exchange of ideas has long made American foreign policy great.
Photo Credit: Rouzbeh Fouladi
In Reprieve for Multinational Business, Trump to Stave Snapback of Iran Sanctions
◢ Later today, President Trump will decertify Iran's compliance with the JCPOA on national security grounds. However, early reporting based on background briefings provided to European officials makes clear that administration does not intend to walk away from the Iran Deal.
◢ Instead, Trump is pushing the issue of Iran policy to Congress, recommending new actions to counteract Iran, but not going so far as to recommend the full "snapback" of sanctions.
Following a lengthy interagency review, Donald Trump will today unveil his new Iran policy, bringing to an end months of speculation as to his administration's intentions. Despite Trump’s view of the Iran Deal as “the worst deal ever,” early reports make clear that Trump will not be withdrawing from the Joint Comprehensive Plan of Action (JCPOA).
Despite recent political uncertainty, underlying commercial momentum has remained strong in 2017. Trade between Europe and Iran nearly double in the first half of 2017, compared to the same period the year prior. The Iranian government reports that commitments of foreign direct investment have risen 55% in the last Iranian calendar year. The spectre of decertification has been seen as a risk to this steady growth.
On Thursday, the Trump administration provided background briefings to European diplomats and the members of the press outlining the content of the pending announcement. While specific details of the new strategy remain embargoed until shortly before Trump’s speech, which will be made at 12:45 EST, reporting by the Julian Borger of The Guardian and the Matthew Lee of the Associated Press, outlines a strategy that is less damaging than had been feared.
While President Trump will formally decertify Iran’s compliance with the JCPOA, he will do so not in denial of Iran’s technical compliance with the agreement, which has been subject to eight confirming reports by the International Atomic Energy Association (IAEA), but rather on the basis of America’s national security interest, in accordance with a specific provision for decertification stipulated in the Iran Nuclear Agreement Review Act (INARA).
The move to decertify will push the issue of the Iran Deal to Congress. The Trump administration is seeking new amendments to INARA in an attempt to address perceived “flaws” in the JCPOA. These include new provisions relating to Iran’s ballistic missile program and the activities of Iran’s Islamic Revolutionary Guard Corps (IRGC) that would automatically trigger the snapback of secondary sanctions in the event of a violation. Importantly, the administration is also seeking an amendment to INARA to remove the requirement for Trump to certify Iran’s compliance every 90 days, a move widely seen as a face-saving maneuver for an administration beset by infighting on the issue.
Crucially for multinational businesses active in Iran, the administration will not be recommending Congress reimpose the sanctions removed as part of the implementation of the JCPOA, which would have been tantamount to America’s withdrawal from the deal. The administration has also decided not to designate the IRGC as a terrorist organization, a move which would have risked drawing the Iranian government into an escalation.
As such, Trump’s announcement will have little immediate bearing on the ability of multinational companies to continue to trade and invest in Iran. Business leaders had long expected Trump to eventually decertify Iran’s compliance and had proceeded with commercial contracts accounting for such a move. In a recent survey of business leaders, 68% of Iranian respondents and 63% of non-Iranian respondents considered snapback a likely or very likely outcome of decertification. The fact that the administration is not recommending the reimposition of secondary sanctions will be seen as a reprieve. The question that now remains is the extent to which Congress wishes to redefine the scope of compliant trade and investment through amendments to INARA.
In what some business leaders see as a silver lining of the turmoil caused by the decertification issue, it may be that more definitive action by Congress could actually help safeguard the implementation of the JCPOA and by extension the operations of multinational businesses in Iran. For example, removing the rolling certification requirements would reduce political uncertainty surrounding the deal and its continued implementation.
Moreover, that Trump is not withdrawing from the agreement demonstrates that coordinated diplomacy can protect the JCPOA in Washington, and by extension, protect market access. In response to rising political uncertainty, and in the lead-up to today's announcement, European governments and the European business community significantly increased their level of direct dialogue on matters related to Iran Deal implementation. This dialogue helped ensure that the missions of the European diplomatic corps and the business community were mutually reinforcing. The progress made by businesses in engaging in Iran, with notable deals signed this summer by many of Europe’s industrial giants, helped underline the strategic value of the JCPOA for Europe beyond the realm of security issues.
The diplomatic efforts will need to continue. Congress is expected to make its determinations regarding the amendments to INARA within the next two months. There is significant risk that Congress could introduce new provisions to INARA that make compliance politically untenable for the Iranian government, which will see possible automatic snapback as a kind of booby trap. However if Congress takes a more sensible approach, the Iran Deal may yet emerge stronger than before. The new Trump strategy is minimal in its prescriptions. European leaders, must step in to define what a workable Iran policy looks like for all parties.
Photo Credit: Wikicommons
Majority of Business Leaders Blame Trump for Slow Iran Investments
◢ A new survey by Bourse & Bazaar and IranPoll finds that business leaders believe Trump's rhetoric has slowed the pace of trade and investment by multinational companies in Iran.
◢ However, the results come at a time when the underlying commercial momentum seems strong. This suggests that Trump's words are having an impact not on those most directly working with Iran, but on the stakeholders on whom they rely.
This article was originally published in LobeLog.
As President Donald Trump threatens to de-certify Iran’s compliance with the JCPOA, the political environment around post-sanctions trade and investment has grown more contentious. Yet, at the same time, after extensive negotiations with leading multinational companies, Iran has witnessed landmark agreements signed across industries, with billions of dollars of investment committed and financing agreements inked. For those business leaders continuing to push ahead in Iran, and for the Iranian public to whom they are accountable, the question is what to make of such contradictions.
To examine this and other questions, Bourse & Bazaar partnered with IranPoll to conduct a unique survey focused on economic attitudes and business confidence in Iran. The survey was conducted in August 2017 and covered a representative sample of 700 Iranians.
Several of the questions centered on post-sanctions investment and the political importance of the JCPOA. But perhaps most notably, 70% of Iranians surveyed believe that multinational companies are “moving slower than they could” to trade and invest in Iran following the lifting of international sanctions. Of this group, a significant 76% of Iranians identified “pressure or fear of the United States” as the key reason, compared to just 16% would blamed Iran’s “weak business environment.”
It is certainly sensible for Iranians to blame Trump’s antipathy towards the nuclear deal as a primary reason for the slow pace of Iran’s post-sanctions economic recovery. But this view might unfairly discount the inherent difficulties of investing in Iran, a fact that the Obama administration highlighted when concerns over the slow pace of economic engagement first emerged in early 2016.
It seemed a reasonable assumption that the “experts” who are the business leaders or policymakers actually trying to make trade and investment happen might have a different, more nuanced view than the Iranian public. The barriers to trade and investment in Iran are very real. The country ranks 120 in the World Bank’s “Ease of Doing Business” rankings, having actually fallen three places in the last year.
Results of the “Expert” Survey
To investigate this assumption, IranPoll and Bourse & Bazaar administered an online survey that collected responses from just over 250 “experts,” sampled based on their active involvement in Iran trade and investment matters. Of these respondents, 79% held either a master's degree or PhD, and 70% were professionals from European or Iranian private-sector enterprises. The remainder worked in state-owned enterprises, government agencies, or policy institutes. Importantly, 70% of respondents considered themselves to be either somewhat or well-informed about investing in Iran.
In an amazing example of statistical congruence, 70% of the expert respondents surveyed believe that multinational companies are “moving slower than they could” on trade and invest in Iran. Of this group, 76% blame “pressure or fear of the United States” for the slow movement, with just 17% blaming Iran’s challenging business environment. These proportions directly mirror the results seen in the survey of the Iranian public. How can it be that these experts, who know all too well that Iran is a difficult place to do business, are seemingly discounting those difficulties in the face of Trump’s rhetoric?
The answer may lie in the slow and steady progress that has been made in Iran trade and investment in the last year. Major contracts signed in 2017 include the first major post-sanctions investment in Iran’s oil sector, the first automotive investment majority owned by a foreign multinational, and the first equity stake taken by a global financial institution in an Iranian financial services firm, in addition to several major financing agreements and even more unheralded deals. This overall momentum, hidden to all but those watching Iran most closely, suggests that business leaders, as well as the regulators and policymakers with whom they work, have gained a sharper understanding of how to conduct business in the country. Although Iran’s economy remains rife with obstacles, business leaders are proving more adept navigators. For example, in the same survey, 74% of respondents said that they believe they know the right people to conduct business in Iran. As business leaders gain confidence in their own abilities and greater means to manage challenges within their control, the turmoil in Washington remains the key complication to trade and investment plans.
But if the business leaders are able to recognize American rhetoric as superficial, why exactly is it slowing the pace of trade and investment? This is likely because the rhetoric is impacting decision-making not for those closest to projects in Iran but for those stakeholders on whom they rely.
Commercial Agenda Advances
Reading the headlines on Iran, driven by Trump’s soundbites, it would be easy to believe that Iran is an untenable place to do business in the current political environment. Yet, the “country managers” who run business divisions in Iran for multinational companies have made considerable progress over the last year in pushing forward a commercial agenda. This contradiction may explain why 69% of respondents in the expert survey felt that international media outlets are not an accurate source of information about Iran’s “trade and investment environment.”
The slowdown occurs when the question of Iran crosses the desks of decisionmakers further from the point of contact. By dint of their progress, country managers increasingly need to draw on support from other parts of their multinational organizations and suppliers and partners in order to execute strategy. Most crucially, as a project reaches contract stage, it becomes imperative to find a financing solution. This requires the country manager to both bring his senior executives on board with the project plan and then seek engagement from a financial institution. When critical decisions reach this wider circle of stakeholders, headlines become far more salient. These stakeholders cannot draw on firsthand experience to bolster their confidence in an Iran-related commercial decision and rely instead on the incomplete picture painted in the international media. Understandably, they find it difficult to act decisively in the face of uncertainty, particular when personal or company reputations come into play.
In this way, Trump’s rhetoric is slowing the momentum of trade and investment prior to any snapback of sanctions. No doubt, Trump’s impending decision on decertification of Iran’s compliance with the JCPOA does make snapback a potential outcome. Tellingly, 68% of Iranian respondents and 63% of non-Iranian respondents in the expert survey considered snapback a likely or very likely outcome of decertification.
However, in this intervening period, during which there has been no instrumental change in US policy, the reported slowdown in trade and investment helps demonstrate a deficiency in how deal supporters are counteracting Trump’s message. The critical point is that Trump only has his message. Given the track record of his administration, he is unlikely to have a cohesive Iran policy at any stage, even if he decides to decertify.
Deal supporters in Washington ought to define the economic scope of sensible Iran policy more clearly and thereby support business confidence more actively. The imperative here follows directly from what it means to offer “sanctions relief.” As a policy tool, sanctions impose political ideology on economic structures. The act of sanctions “designations” makes a normative judgement about the objective composition of an economy, defining the acceptable level of commercial relations with certain economic actors. Consequently, crafting an effective post-sanctions policy requires its own congruence between ideology and structure.
In the case of Iran, the objective reality that trade and investment are incentivizing structural liberalization in Iran’s economy needs to be expressed and valued in ideological terms. Encouragingly, European stakeholders have become more assertive in presenting such a vision. Helga Schmid, secretary general of the European External Action Service, stated in a recent speech at the 4th Europe-Iran Forum, “We recognize that it is important that the benefits of the Iranian deal are felt directly by the Iranian people and Iranian businesses. This is necessary for the success of the deal, but it is also in the interest of the EU, its Member States and economic operators.”
Deal supporters in Washington should likewise be more confident in declaring that, where sanctions relief allows, companies ought to be free in engaging in trade and investment in Iran. Commerce not only helps preserve the nuclear deal but it can also help incentivize financial, industrial, and legal reforms, in a manner akin to how enterprise has helped successfully open economies in Eastern Europe, Latin America, and Southeast Asia. Of course, this amelioration will only take place in the medium to long term. But in the near term, a tactical insistence on stronger messaging around economic engagement is necessary to support those stakeholders whose work is so crucial to the quid-pro-quo of the deal and whose activities are fundamental to winning the hearts and minds of an Iranian public already so hopeful that engagement will deliver a brighter future.
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