Iran: Crossing the Rubicon by Soroosh Mohammadi | An Iranian Assessment

Iran: Crossing the Rubicon by Soroosh Mohammadi | An Iranian Assessment


By Soroosh Mohammadi
By nature, we are a curious bunch. Curiosity is encoded in our DNA. A brisk read through quotes from immortals the likes of Voltaire, Emerson and Einstein would certainly vouch for that.
Being intrinsically curious, we sometimes cannot help but think: what if history did not transpire the way it did?
What if the Persians were never defeated at the hands of the Greeks? What if Caesar never crossed the Rubicon? What if Columbus never discovered the New World? What if the Bolsheviks never seized state power in 1917? What if the Academy of Fine Arts in Vienna did not reject Adolf Hitler (twice)? What if 9/11 didn't occur?
Life as we know it is in perpetual motion and, if history had taken an alternative dimensional course, we may never know what the present outcome would have been.
There are, however, certain questions that bear answers through forecasts based on empirical evidence. One in particular would be what if Iran and the P5+1 reach an agreement before, or by the July 2015 deadline?
What opportunities will it create for prospective investors with an appetite for emerging markets?
At first glance, a look at the World Economic Forum’s Global Competitiveness report, published in September 2014, might even make Gordon Gekko a bit squeamish. This report, which assesses the competitive landscape of global economies, placed Iran 83 out of 144 countries. Iran was positioned almost 40 places below neighboring Turkey and 60 below Saudi Arabia. Even the current politically unstable Ukraine is 7 spots above Iran.
But be aware, the Global Competitiveness report may not necessarily paint a complete picture. The index has no intrinsic measure of ‘potential’. And Iran oozes with potential.
So when we say potential, what’s at play?
Well, what if your investment adviser would pitch a fund to you that leverages the consumer base of Turkey, crude oil reserves of Saudi Arabia, natural gas reserves of Russia, the mining potential of Australia, and the stock market performance of Venezuela?
Iran encompasses all of the above opportunities, with plenty of upside, all in one single domain.
The Social & Economic Indicator Parable
There is no denying the notion that Iran, having been marginalized by sanctions, has lost a competitive edge amongst developing nations. Still, today Iran boasts the world’s 18th largest economy with a $1.2 trillion purchasing power parity. Iran has just as much, if not more, potential for industrialization than its neighboring Turkey.
For sure, Turkey’s $827 billion GDP may dwarf Iran’s $366 billion GDP in terms of value. Even at the highest point in 2011, when crude oil markets sustained prices above $100 per barrel, Iran’s GDP was at $528 billion. But this only demonstrates the potential room for growth in Iran’s ambition to become an industrialized nation.
At the present, Turkey may be a more technocratic state, with advancements in certain industries. But Iran boasts as diverse a manufacturing base as Turkey does. For instance, Turkey’s automobile sector, one of its strategic industries, has maintained steady production whereas Iran’s has faltered. Just 4 years ago, Iran’s total automobile production was approximately 1.7 million versus Turkey’s 1.1 million. Since then, the number in Iran has plummeted by more than half to 740,000 versus Turkey’s steady 1.1 million production capacity.
Iran’s umbilical cord has been cut from the global commercial matrix. Hence the country has not been able to further develop its industries. What is needed is for leading nations such as Japan, Germany and the US with proprietary technologies to export their products, technologies and expertise to a market that spreads well beyond the borders of Iran. Would it not be viable to see the Mathew McConaughey inspired Lincoln SUVs in downtown Tehran, Kabul or Baghdad? The demand is there. And any established blue chip company would surely be interested in entering new markets.
Just as Turkey serves as the gateway to the EU and the Middle East, so Iran has its own surrounding universe; the CIS countries, Iraq, Afghanistan and the wider Middle East. This offers great opportunities to companies that are looking to expand in the wider region. In the Wall Street Journal, a recent report cited the US military’s attempt to win sanction waivers for Iran in a bid to facilitate investment in neighboring Afghanistan. And the simple reason as stated by the head of the task force Joseph Catalino? “You can’t ignore Iran.”
As for social indicators, Iran and Turkey bear an uncanny resemblance. Both have close to 80 million populations, and in both cases the majority of the population is under the age of 30. In Iran’s case, with 60% under the age of 30, they are particularly tech savvy. With over 45 million active internet users (55.7% penetration rate) there are more Iranians glued to their laptops, desktops and iPads than in the Philippines, Vietnam and Egypt; all countries with larger populations. There are more active internet users in Iran than even more advanced economies such as Spain, Italy and South Korea. Granted, in the case of South Korea there is an 85% penetration rate, but it is only a matter of time before Iran catches up. For instance, internet users in Iran went from 250,000 in 2000 up to 45 million in 2013, a 17,900% growth, versus Korea’s 118% from 19 million to over 41 million internet users. This implies one phrase that any prospective investor would like to hear; upside opportunity. Iran has potentially 48 million consumers who want iPhones, iPods and MacBooks. Senior Apple executives have already acknowledged this and have begun negotiations on opening official sales channels in Iran.
Iran also has more mobile users than the UK, France and even Mexico. The 96 million mobile users will soon make the transition to smartphones. If it’s not iPhones, then rest assured it will be Huaewei, Oppo or Samsung. In the spirit of capitalism, can America risk the chance of losing substantial market share to its international competitors?
Also in a new age commercial sector, can Amazon, Google and Uber avoid a market with such vast potential such as Iran? If they are not permitted to enter the market, then it will encourage domestic companies to set up their own platforms.
And don’t forget, there is a whole range of FMCGs, discretionary items and even heavy industrial equipment that is in dire need in Iran. For instance, Boeing and General Electric have obtained licenses from the US Government, for a ‘limited period of time’, to sell spare airliner parts to Iran.
The Oil & Gas Parable
Iran holds the world’s 4th largest proven crude oil reserves and the second largest natural gas reserves behind Russia. Yet, throughout the course of the past few years, sanctions have drastically prohibited the growth and development required for upstream projects.
Granted, the Iranian constitution prohibits foreign or private ownership of natural resources, thus ruling out potential concessions for big international oil companies. The Government however is addressing this concern and is planning to change the oil contract model to further entice international oil companies to participate in upstream, midstream and downstream projects.
The Mining Parable
Iran, with roughly 1% of the world’s population, holds more than 7% of the world’s total mineral reserves. The country, however, is in urgent need of foreign capital, technologies and expertise to further develop its mining sector.
It is well placed when it comes to comparing ‘commodity wealth’ with mineral-rich countries such as Australia, Kazakhstan or Chile. Iran holds some 68 types of minerals, with 37 billion tons of proven reserves and more than 57 billion tons of potential reserves, together with the world’s largest zinc reserves, second largest copper reserves and eighth largest iron ore reserves.
Take copper for instance. With the world’s second largest copper reserves, Iran is still a net importer of refined copper. The country’s refined capacity production is nowhere close to Chile’s approximate three million ton refining capacity. This is a direct result of a lack of foreign investments and expertise. Chile, for instance had a cumulative foreign direct investment of $214 billion in 2013 versus Iran’s paltry $37 billion. Would it not afford a great business opportunity to, say, Freeport-McMoran (FCX), the world’s largest producers of copper strips, copper wire and bars, to invest in Iran’s copper production?
The Capital Markets Parable
Iran has an emerging and diverse capital markets sector. With a market capitalization of roughly $150 billion, the Tehran Stock Exchange is the second largest in the Middle East behind Tadawul in Saudi Arabia. Last year, its index rose by 130% making it one of the best performing equity indices in the world. First place honor would have to go to Venezuela’s benchmark IBC Index. This index, which lists 11 of the most liquid stocks on the Caracas Stock Exchange, witnessed astronomical gains of 480%.
The Iranian capital markets performance is particularly attractive when viewed as a benchmark. Turkey’s main exchange has foreigners holding close to 50% of listed securities; in Iran, that figure is below 0.1%. There are over 300 companies listed on the TSE for investors to sink their teeth into, spanning 40 different industries ranging from pharmaceuticals, mining, banking, petrochemicals and construction to housing and other commercial sectors.
As for fixed income management, we should take a closer look at one particular variable of macroeconomics. Iran’s Government debt to GDP ratio sits over 10.6%. This fiscal ecosystem, should the denominator grow, may prove to be particularly attractive to lenders. So the question arises, why, as an emerging market with a relatively low credit risk, should not PIMCO, the most active fixed income investment manager with 1.87$ trillion in assets under management (AUM), invest in Iranian Government bonds? On a fundamental level, wouldn’t that be more attractive than Brazil’s 56% government debt to GDP ratio, Germany’s 76% or Japan’s colossal 240%?
There are concerns however, with high inflation and massive currency depreciation a natural cause of anxiety to potential investors. The shrinking economy and fiscal disruption is a direct result of the sanctions. However, even with the recent currency crisis, Iran managed to weather the storm with no outside intervention or funding; this in contrast with the ‘Asian Tigers’ who defaulted in 1997 and had to be bailed out by the IMF. Due to these sanctions, the Iranian government had to be resourceful and established its own fiscal policy, there being no IMF to aid the hemorrhaging domestic economy. This should instill confidence to fixed income investors, knowing that Iran’s fiscal policy makers are prudent and systemic with their budgetary management.
So back to the main question; what’s at play?
Wall Street, eight blocks long, runs 0.7 miles west to east from Broadway to South Street and serves as a cradle of capital creation and liquidity. The combined market capitalization of NYSE and NASDAQ accounts for almost 35% of the $70 trillion total World GDP.
Accounts documented in the Book of Esther show that, in 500 BC, Darius the Great, King of the Achaemenid Empire, who rebuilt the 1,600 mile ancient highway known as the Royal Road, used to send dispatches from Susa all the way to Sardis. During the time of the Persian Empire, this road was the equivalent of Wall Street and served as a beacon of capital wealth, creating a banking and monetary system to support the growth of agriculture and international trade.
“The die is cast”. Those were Suetonius’ words to Caesar as he and his legions crossed the Rubicon. We have reached a point of no return. Both sides can gain from this monumental juxtaposition.
The time has never been better to link Wall Street to the Royal Road.
About Author: Soroosh Mohammadi is the Director of Morra Capital and based out of Dubai, United Arab Emirates. He could be reached at his LinkedIn profile.

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