Iran Country Profile
November 2015
Key Statistics A very enticing minefield GDP, US$ bl n* $415.0 Population, mln 77.8 “Yesterday I was clever, so I wanted to change the world. Today I GDP/Capita, US$ $5,334 am wise, so I am changing myself” GDP/Capita, PPP basis, US$ $17,150 Source: State Statistics Committee Jalāl ad‐Dīn Muhammad Rūmī, 13th Century Persian poet and scholar * 2015 – Year‐end as of 31 March Nuclear agreement may be a catalyst for change. The economic cost of sanctions led to shifts in the internal political balance of Iran. The lifting Key Macro Indicators* of sanctions and the expected inward flow of investment as a result of 2015 2016E that should further strengthen the pragmatic factions in the country. Growth, real % YoY 0.6% 2.5% Consolidated bdgt., % GDP ‐3.5% ‐3.0% Foreign investors will need to conform to local interests. Iran’s Unemployment, % eop 11.5% 12.0% concessions to unblock sanctions do not change important fundamental CPI ‐ average, % YoY 14.0% 12.5% differences between Western and Iranian ways of conducting business Curr. account, % GDP 0.4% 1.3% and government. Any investment project will need to conform to local state and business interests. Trade balance, US$ bln $20.0 $24.0 CB reserves, US$ bln* $120.0 $115.0 Whose interests might you harm? An important issue for investors will Sovereign debt/GDP % 11.0% 12.0% be to ensure that projects conform to the spirit as well as to the letter of CB refinancing rate 14.0% 21.0% the law, and what impact the project might have on the economic and Rial/US$, eop 27,700 30,000 political agenda of the Revolutionary Guard and the Bonyads (Trusts Source: Macro‐Advisory estimates, IMF which control 20% of GDP). * 2015 – Year‐end as of 31 March Potential oil sector recovery. We estimate that Iran can initially boost its * includes Sovereign Wealth Fund oil exports by 0.5‐0.7 mln barrels per day (mbd), including 0.2 mln barrels per day from an estimated 30 mln barrels of oil in storage, rising to a Tax Rates sustainable 1 mln barrels a day only if/when it can mobilize investment. Corporate tax 25.0% Total tax take, average* 44.1% Boosting gas exports will take longer. Iran sits on some of the world’s Personal tax** 15‐35% largest gas reserves, but developing this and boosting exports is expected to take between five and 10 years. Iran has just agreed a contract to Sales tax 7.0% import a much larger volume of gas (and electricity) from Turkmenistan. Source: Iran Government * World Bank survey Institutions already in place. A big difference between Iran and other ** Depends on income band post‐reform countries is that it already has banking infrastructure and a stock exchange, albeit only 0.1% of the listed stocks are foreign owned. Sovereign Credit Ratings Opportunities for direct investment. The fastest growth is likely to come N/R S & P, Moody's, Fitch in the form of services for Western businesses such as accounting and Source: Rating agencies legal, as well as in industries already identified as priorities by the state, which include aviation, automotive, agriculture, construction, transport Major Holidays in 2015‐16 and logistics. The consumer sector, which already sees turnover of US$20 Oil Nationalization Day 19‐Mar bln each month, has considerable long‐term growth potential, albeit Norooz (Persian New Year) 20‐23‐Mar many Western brands face well entrenched clones (e.g. Mash Donalds). Islamic Republic Day 31‐Mar Sanctions hold back economy. Iran produces annual results based on a Nature Day 1‐Apr financial year that concludes at the end of March. GDP may grow 2% in Khomenei's Death Remembrance 3‐Jun the year to end‐March 2016 if sanctions are lifted on schedule and Eid‐e‐Fitr (end of Ramadan) 7‐Jul investment picks up. Tassoua & Ashura 11‐12‐Oct Birthday of Prophet Muhammed 17‐Dec Hawkish Central Bank. The Central Bank has adopted a very hawkish Source: TimeandDate.com stance on interest rates in an effort to control inflation. It has also allowed the rial to devalue in response to the weaker oil price and as part of efforts to create a more competitive economy.
Chris Weafer +7 916 349 2039 Tom Adshead +7 916 510 3753 Anastasia Obukhova contributed to this report. cjw@macro‐advisory.com tga@macro‐advisory.com http://macro‐advisory.com/ http://macro‐advisory.com/
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Iran Country Profile
Summary
Removal of sanctions will unlock investment potential and boost economic recovery. The signing of the Joint Comprehensive Action Plan between Iran and the P5+1 group in July 2015 concluded 18 months of negotiations. This will allow Iran to develop its nuclear industry in a way that satisfies Western powers, and in return the West will unlock the sanctions imposed on Iran. The sanctions regime was loosened as the negotiations progressed, and brought modest GDP growth of 1.5% YoY in 2014 driven by a recovery in crude oil production and oil export growth, and, more importantly, a recovery in industrial production.
Oil exports can rise quickly. Although the sanctions are not yet lifted formally, foreign companies are already showing interest in the Iranian market, especially in the oil and gas sectors and the prospect of Iranian gas shipments to Europe. Iran is expected to relatively quickly restore up to 0.3‐0.5 mbd of oil production, and, add approximately 200,000 bbl per day from the estimated 30 million barrels of oil the country has in storage, thus exports of 0.5‐0.7 mbd can be quickly achieved. Iran currently produces 2.85 mbd of crude.
Gas exports will be slower and more expensive to realize. Iran clearly has the potential to be a major gas exporter – it sits on reserves almost equal to those of Russia – however, the timeline to become a significant exporter of gas, and to challenge Russia in the EU gas market, is expected to take a minimum of five years and, probably, closer to 10. Iran recently agreed a deal with neighboring Turkmenistan to boost gas and electricity imports in order to have sufficient energy to support the government’s economic recovery plans.
SWIFT exclusion and oil embargo are the key sanctions. Sanctions were the key instrument of influence over Iranian politics after Mahmoud Ahmadinejad came to power in 2005. A large number of countries gradually started imposing sanctions against Iran. The most damaging sanctions were those imposed by the US and the EU, prohibiting purchases of Iranian oil and cutting off the Iranian banking system from SWIFT. Oil export revenues had accounted for about 50% of government revenues before the sanctions were imposed. The sanctions led to the rial losing two‐thirds of its value, from 10,000 against the US dollar in 2011 to almost 30,000 currently. The oil price collapse also contributed to the rial weakness, but more than half the decline pre‐dated the oil price move. Iran is also hoping to have restrictions lifted on foreign companies operating in the energy sector and in transportation services.
Significant investment opportunities. Lifting the sanctions regime will open up one of the biggest economies in the region – and a population of close to 80 million – with considerable long‐term potential. Apart from the oil and gas industries the other areas which have been identified as offering significant potential for foreign strategic investors include:
Automotive: The biggest automotive market in the Middle East, currently – according to officially published data – accounting for 10% of Iranian GDP (taking the whole supply chain into account). The main opportunities will be in the import of luxury brands and SUVs, as well as spare parts, and also in JVs with domestic manufacturers.
Aviation: The current fleet of aircraft, both passenger and cargo, is very old. It is estimated that the country’s passenger and cargo airline operators will need to buy 300‐500 new aircraft over the first five years of a sanctions‐free economy.
Agriculture: The government is expected to prioritize import substitution programs in order to boost the sector, which already accounts for 20% of GDP, and to create jobs in the food sector. There will be opportunities across‐the‐board for foreign investors in the agriculture sector, including food production. Opportunities are also expected in the supply and distribution chain, including refrigeration, logistics centers, truck sales, etc.
2 Iran Country Profile
Consumer: Iran has the potential to become the biggest consumer market in the region. The main threat and barrier for foreign brands is the large number of clones which operate in the retail and IT segments. They will be hard to dislodge. While Iranian consumers may be inclined to buy genuine products, i.e. as and when their incomes rise, this may be limited if those behind the clone market succeed in blocking those imports. That said, the retail market is currently worth US$150 bln annually, and total consumer spend is conservatively estimated at US$20 bln per month.
Communications: The communications market is dominated by state and other insider companies. The main potential for foreign investors is expected to be in equipment upgrades and in the supply of smart phones.
IT: The government claims a high level of internet penetration (40%), but the reality is expected to be a lot lower. The main issue for international companies is the prevalence of clones and the fact that the government has clearly stated that while foreign brands are welcome they will have to comply with local social and political practices and procedures.
Real‐estate & construction: The declared potential in the construction sector is clearly enormous. It covers not only actual construction, but equipment supply, design, project management, etc. However, this is also one of the most important “insider” industries in Iran, and foreign companies will need to tread very carefully to gain entry and avoid problems.
Transport and logistics: Iran is part of China’s Maritime Silk Road project and some rail links have already been built. The government has also published an impressive – and expensive – list of road and rail projects it would like to fund and build.
Threats and risks. Iran’s concessions to unblock sanctions do not change important fundamental differences between Western and Iranian ways of conducting business and government. Any investment project will need to conform to local state and business interests, and will run into problems if it does not. For instance, Iran’s Petroleum Minister, Bijan Zanganeh, rather ominously said recently: “We recommend foreign firms to avoid any encounters or negotiations with corrupt people. If so, they will not only damage their credibility, but will also miss the opportunity to be present in Iran.” Another threat is that of property confiscation by either the Setad, the economic organization that supports the Rahbar (the Supreme Leader), or by one of the Bonyads (religious funds).
Whose interests might you harm? An important issue to consider will be to ensure that projects conform to the spirit as well as to the letter of the law, and what impact the project might have on the economic and political agenda of the Revolutionary Guard and the Bonyads. These are directly connected to the center of power in Iran (see the chart on page 35). They represent a state within a state, and if the state as a whole has lucrative business to allocate, they will have priority.
Choose wisely. The above implies the need to work with a partner in Iran, and this is likely to be the case for any project outside the consumer sphere, i.e. where the end client might be the state or a state‐related body, or where regulation is an issue. The problem here is that the Revolutionary Guard is likely to remain sanctioned, and care will be needed in working with its economic affiliates. Investors will need to perform careful due diligence to tread the line between partners that are right for Iran, and those that are acceptable to the US government.
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Low ranking in World Bank survey. Iran was ranked 118 in the latest World Bank Ease of Doing Business Survey (up from 119 in the revised 2015 survey). However, a deeper dive into these numbers suggests that this impacts the cost of projects rather than their viability. Iran is penalized for long approval times, the cost of utility connections, and the cost of registering property. We consider that these are not fatal to projects, but they do need to be accounted for in feasibility studies. The country has, however, recorded a big gain in the time and cost of getting construction permits (from 98 to 69) – see page 28 for the full table. It is more the unpredictability of policy that acts as a real barrier to projects, and this is less of a problem in Iran than in the former Soviet Union.
Sizeable but closed stock market. As of end‐September, the value of shares listed on the Tehran stock exchange totaled almost US$95 billion. The average market P/E is less than 6. However, only 0.1% of the market is owned by foreign‐registered investors.
Debt financing. There is more immediate potential in the debt market because of the extensive infrastructure program announced by the government and the huge costs associated with it. The country’s existing sovereign debt to GDP is less than 11% of GDP.
Third‐largest economy in the region. According to World Bank, in the fiscal year to end‐March 2015, Iran’s GDP reached US$415 bln, up 0.6% YoY. The IMF World Economic Outlook Database estimated the figure at US$404 bln, with GDP per capita at US$5,335.
Oil price weakness has been painful but not critical. The collapse in the oil price has impacted the economy in 2015, forcing the government to cut budget spending. However, the overall impact has been relatively limited as Iran was forced to adapt to the sanctions regime long before the collapse in the oil price. Hence, imports were already low, which dhelpe support a current account surplus and cap total sovereign debt at just above 10% of GDP.
Flexible monetary response. The Central Bank has adopted a flexible approach to the rial, effectively devaluing it in tandem with the falling oil price. The benchmark interest rate has more than doubled to 21% in 2015, as part of Central Bank measures to ensure headline inflation does not return to 20% or higher, as it had in early 2014.
Iran – Key Macro Trends (2015 – Year‐end as of 31 March) 2009 2010 2011 2012 2013 2014 2015 2016E 2017E لاير14,290 لاير12,535 لاير10,900 لاير11,955 لاير11,718 لاير7,069 لاير4,638 لاير3,753 لايرGDP, nominal, rial, bln 3,522 GDP, US$ bln $355.0 $363 $423 $575 $556 $494 $415 $432 $1,441 GDP, real growth, % YoY 2.3% 6.6% 3.7% ‐6.6% ‐1.9% 4.3% 0.6% 2.5% 4.5% Inflation, average, % YoY, eop 10.8% 12.4% 21.5% 30.5% 34.7% 15.5% 14.0% 12.5% 9.5% Unemployment 11.9% 13.5% 14.5% 13.0% 12.3% 10.5% 11.5% 12.0% 11.5% Consolidated budget, % GDP 0.7% 0.8% 2.7% (0.6%) (0.3%) (1.5%) (3.5%) (3.0%) (2.5%) Current account, % GDP 2.4% 5.9% 10.5% 4.0% 7.0% 3.8% 0.4% 1.3% 2.8% Trade balance, US$ bln $19.1 $27.0 $66.0 $30.0 $29.0 $22.0 $20.0 $24.0 $25.0 Sovereign debt, % GDP 10.2% 11.5% 13.5% 9.2% 11.8% 10.6% 11.0% 12.0% 13.0% Monetary reserves, US$ bln $110.0 لاير9,920 لاير30,000 لاير27,700 لاير24,770 لاير12,300 لاير12,300 لاير10,400 لاير10,300 لايرRial/US$, eop 9,870 لاير9,920 لاير29,000 لاير26,265 لاير24,200 لاير21,076 لاير12,294 لاير10,964 لاير10,339 لايرRial/US$, average 9,920 Brent, average, $ p/bbl $63 $80 $111 $112 $110 $99 $85 $60 $70 Source: Central Bank of Iran, Tradingeconomics, IMF, Macro‐Advisory estimates
4 Iran Country Profile
Iranian domestic politics is highly complex. The Western observer tends to divide groups into pro‐reform and anti‐reform, which can be unhelpful, as it assumes that the debate is about whether or not to become more Western. For instance, there are elements in the Revolutionary Guard that accept concessions to avoid sanctions, as they understand this will strengthen the economy and increase resources for national defense. Pro‐reform elements in the government are nonetheless committed to keeping Iran as a religious state. Disputes between the groups can also localize around business interests as well as policy differences.
Potential for a grass‐roots revolution. The public uprising in reaction to the election of 2005 (the “Green Revolution”) may play the same role in Iranian political development as Tiananmen Square did in China. That is, it was crushed, but served to make the state aware of its need to orient itself to the interests of the people as well as its own. Nevertheless, in a country where 24% of the population is under fifteen years old and 40% is younger than thirty the state’s job is to try to channel these people into productive employment rather than to allow conditions for political activism to materialize. There is a saying that “hunger brings people to the streets and politics keeps them there”. This idea will have impelled the need to create jobs and contain food inflation.
Potential geopolitical role. Iran has huge potential to play a positive role in dealing with regional problems in the Middle East. It can help in the battle against the ‘Islamic State’, in resolving Sunni‐Shi’a tensions, especially in Iraq, and in countering the trafficking of drugs from Afghanistan. Iran will also play a key role in China’s New Silk Road project, as it is the only country which the transport network must pass through, assuming it does not go north via Russia.
Iran and its Major Cities and Neighbors
Source: Lonely Planet
5 Iran Country Profile
National statistics
National calendar: 2015 is 1394 under the Iranian calendar
Population: 77.8 million (end 2014 est.), a density of 42.9 per square kilometer
Ethnic mix: 65% Persian
16% Azeri & Turkic
7% Kurdish; 6% Lurs; 2% Arabic; 2% Baluch; 1% Turkmen
Capital: Tehran (approx. pop. 8.5 mln; the greater metropolitan area has 13.5 mln)
Major languages: 67% Persian & Luri
18% Azeri & Turkic
10% Kurdish
2% Arabic
Major religion: 90‐95% Shi’a Islam
5‐10% Sunni/Sufi Islam
Life expectancy: 68.8 years (Male); 71.9 years (Female); health spending is 6.7% of GDP
Adult literacy: 85%; education spending is 3.7% of GDP
Distribution: 23.8% of the population is under 15 years old; 8.1% is over 60
Working population: 28.4 million
Currency: Iranian rial (IRR); US$1 = 29,956 rial (10 October, 2015)
Main exports: Oil ($118 bln), industrial ($19 bln), agriculture ($5 bln), metals ($1 bln)
GDP volume (current US$) US$415 bln (2014 estimate)
GDP per capita: US$5,335 (2014 estimate)
GDP on a PPP basis: US$1,334 bln (2014 IMF estimate), just behind Turkey in 18th place
GDP/PPP per capita: US$17,150
GNI Index: 44.5 (World ranking = 45))
Living below the poverty line: 18.7% of the population
Public debt: 11.4% of GDP
Telecoms: 88% mobile and 17% internet penetration, 37.5 fixed lines per 100 people
Corruption Ranking: Ranked 136 in a survey of 175 countries (the same as Russia) Transparency International
Ease of Doing Business: Ranked 118 out of 189 countries in the World Bank’s Ease of Doing Business Survey 2016 (from 119 in the revised 2015 survey)
Economic Freedom Ranked 171 and rated “repressed” by the Heritage Foundation
WTO Not a member
Land use: Permanent pasture (18.1%), arable (10.8%), forestry (6.8%), other (64.3%)
6 Iran Country Profile
Investment potential
Foreign Investment and Protection Act (FIPPA) of 2002. Foreign direct investments in Iran are regulated and guaranteed from nationalization by the Foreign Investment and Protection Act (FIPPA) adopted in 2002. The law, however, contains a lot of limitations including:
FDI attracted in particular sectors in order to prevent a foreign company from becoming a monopoly in a certain industry.
Forms of investment: buy‐backs are the most preferred type of FDI in the oil sector.
Foreign ownership of natural resources is prohibited.
Production sharing agreements are not allowed yet, but a PSA‐type oil contract draft is being prepared in the form of a so‐called Integrated Petroleum Contract (IPC).
Iran FDI, US$ mln
Source: Central Bank of Iran Islamic banking system in Iran. All banking operations in Iran are interest‐free and regulated by the Usury‐ Free Banking Law adopted by the government of the Islamic Republic of Iran in 1983. The country has a two‐ tier banking system: a) the Central Bank and b) commercial and investment banks. The Iranian banking system is based on common global Islamic banking principles. In accordance with these principals, Iranian banks become co‐participants in the projects to which they provide loans to (and vice‐versa), making Iranian banking operations, in essence, similar to global investment banks.
The state is a key investor. FDI stood at US$43.5 bln in 2014, mainly from China, India and Turkey. Over the past several years the national investment rate in Iran has soared to 30%, driven by the imposition of Western sanctions. After foreign companies were forced to leave Iran, the state became a key investor into the country’s economy. During 2000‐07, investments into private‐backed projects dominated over state investments; that changed however from 2010, when state funding reached the level of private investment. Currently the state contributes about 55% of investment into PPE annually, and its investments into the construction sector are twice that of private investors. Nevertheless, foreign investors still have a large influence over the country’s economic development despite the introduction of sanctions. At the end of 2014, Iran’s accumulated foreign direct investment totaled US$43.5 bln, a jump of 10% YoY (from US$40.4 bln, as of 31 December, 2013), while Iran’s own investments abroad totaled just US$4 bln at the start of 2015. China, India and Turkey remain the key investors into the Iranian economy.
7 Iran Country Profile
Positive balance of payments. Iran’s balance of payments has traditionally been positive due to a current account surplus backed up by oil exports. Before sanctions were introduced back in 2011 and early 2012, Iran’s oil exports were 4‐5 times higher than the non‐oil component, while total exports of goods, services and financial capital were almost double the country’s imports. In the fiscal year to end‐March 2015, Iran’s current account remained positive, but the surplus dropped significantly to US$15 bln because of the international sanctions on Iranian oil exports. The balance of payments for services remains mainly negative, but there is strong growth potential for transportation and logistics.
Investment incentives
Tax‐free and visa‐easy zones already in place. Iran has established designated free‐trade zones and special economic zones in multiple locations across the country. Details of the locations and specific terms attached to each are to be found in the official web site www.freezones.ir. In general, the terms offered include:
A 20‐year tax exemption from the date of activation of all economic activities,
No restrictions on capital flows or repatriation of profits,
100% foreign ownership is allowed, albeit some restrictions apply,
A promise of easier bureaucracy and less rigorous employment regulations,
No visa requirements for those working in the special zones and a promise to make family visas and residency easier,
No tax applied to re‐exports and exports to other parts of Iran,
A promise of greater flexibility in banking and financial transactions.
Which industries are most interesting?
Some sectors are more attractive than others. A country with huge hydrocarbon resources and a population of 80 million which is about to open up to foreign investors has very obvious appeal to strategic and portfolio investors. But, as outlined in the section covering risks (on page 16), the country is not going to be an unrestricted “gold mine”. There are plenty of risks and obstacles for investors to be wary of. That said, some industries are clearly more attractive than others and will offer opportunities for foreign investors.
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Oil & Gas
Refer to page 24 for a more detailed look at the oil and gas sector
Almost half of budget revenues come from oil and gas exports. According to Trading Economics, the oil and gas sector accounted for 23% of GDP in 2014. The IMF’s Article IV report for the same year estimated that the sector made up 45% of budget revenue and about 55% of the total value of exports. It is clearly the critical driver of the economy, especially given the institutional constraints which are holding back the rest of the economy (see a separate section on the World Bank’s Ease of Doing Business Report on page 27).
Gas potential is huge but will be slower to develop. The country’s gas potential is undoubtedly huge. Iran holds almost as much known gas reserves as Russia – the world’s largest – but currently imports gas from Turkmenistan because its deposits are not developed. The country seems to be focusing on developing its oil production first, as evidenced by its recent agreement to extend a long‐term gas‐import contract with Turkmenistan. Longer‐term, Iran does have the potential to supply gas to its southern neighbors – Pakistan and India – and to build a direct pipeline to Europe across the Caucasus.
South Pars field holds 40% of Iran’s gas reserves. Most of the country’s gas is offshore. Iran’s largest gas deposit, the South Pars field, is in the Persian Gulf. The deposit holds approximately 40% of the country’s known reserves. It is “attached” to Qatar’s major offshore gas field which creates the possibility for future disputes.
Boosting oil output is the more immediate priority. Iran holds approximately 9.5% of the world’s known recoverable oil reserves. However, recent production has dropped off to only 2.85 million barrels per day (IEA data for September), compared to 3.7 million barrels per day pre‐sanctions (in 2011). Recovering this output can probably be achieved without the involvement of international oil majors. The country has the potential to expand its oil output to 5 million barrels per day by the end of the decade, assuming the right volume of investment and expertise from foreign peers. Iran’s daily output hit a peak in the 1970s when it reached about 6 million barrels per day, but the combination of a lack of investment, sanctions and maturing oil fields have contributed to the decline. A return to 6 mbd will require the commissioning of new fields, which require at least 3‐5 years of development. All of the most promising reserves are near the Iraqi border – and include the Yadavaran, Yaran and Azadegan fields. The only two foreign partners currently operating in Iran are Sinopec and CNPC. In total, it is estimated these fields could produce about 950,000 barrels per day by 2020.
Plenty of reserve life. Partly because of Iran’s isolation, its reserves are far from depletion, especially since historical recovery rates have been low, in the 20‐30% range. World's Largest Proven Crude Oil Reserves, billion barrels
Source: Oil & Gas Journal
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Investment requirement ranges from US$100 bln to US$250 bln. The country’s Oil Minister, Bijan Zanganeh, has said that Iran will need US$100 bln of investment over the next five years. It is hoped that a lot of this will come from Western oil majors once sanctions are lifted. Western industry experts estimate that the total investment needed to get Iran back to full oil production potential is as high as US$250 bln. To achieve such potential, Iran – as in the case of Russia and the Caspian states – will need to bring in the expertise of Western companies, either via minority equity roles or as contractors, because domestic producers will not be able to achieve the ambitious growth targets alone.
Opportunities. This will mean access to:
Rigs
Drilling equipment
Seismology and other oil‐field services
Production, transportation and storage equipment
Refinery modernization.
Early entrants will have to tread carefully. This will involve significant risk for Western companies, as the Western powers have reserved the right to snap back sanctions if Iran is considered to have backtracked on its commitments. In addition, the returns on investment will have to be estimated under a new type of investment contract that will be introduced later in 2015, and which is untested in Iran.
Automotive
Largest auto market in the Middle East. The auto industry (including the full supply chain) accounts for 10% of Iran’s GDP and employs 4% of its workforce according to official data sources. Over 985,000 passenger cars were sold in Iran in 2014, making it the largest automobile market in the Middle East. Most of these were produced by Iranian manufacturers like Iran Khodro (IKCO) and Saipa. It is the second‐largest industry in the country after oil, employing more than 700,000 workers. The potential for a rebound in the industry is strong, given that car output totaled 1.5 million units annually before sanctions were imposed. This also makes Iran a preferred location from which to export cars across the entire region.
Western manufacturers may lose out if they wait. The government has set a goal to manufacture 3 million cars annually by 2021, but it also understands that to achieve that aim it will need the support of foreign manufacturers. As with the oil industry, we expect Western manufacturers to wait and see how the post‐ sanctions regime develops before they commit to major investments. However, by that time, large Chinese manufacturers may already be embedded in the country, since sanctions are less of a risk for them.
Opportunities exists for a better‐quality product. Local dissatisfaction with the quality of locally produced cars led to a social media “no zero mileage” campaign in mid‐2015, where buyers boycotted new cars and only bought second‐hand vehicles. This led to a dip in sales of domestically‐produced cars, although the decline was also attributed to expectations that better quality foreign manufactured cars would shortly be available due to the lifting of sanctions. Although the extent of the boycott is not known, it was big enough to prompt criticism from the government, and to generate demonstrations against it by auto workers. In any case, there is clearly strong local appetite for better quality foreign cars.
10 Iran Country Profile
Some clear opportunities. The opportunities for foreign investors include:
Importing luxury brands and SUVs, as these will not compete with local products;
JVs with existing auto manufacturers. We have seen this in Russia where the foreign partner brings newer technology and greater efficiency which is used to help improve the local product. The Iranian government is also likely to favor this;
Parts, either for assembly or after‐sales. Initially this may involve imports, but there is a strong likelihood the government will support a localization policy.
Agriculture
Land is mostly privately owned. Agriculture accounts for about 10% of GDP and employs about a third of the workforce, which reflects its importance both economically and politically. The country is mostly arid or semi‐ arid, with the exception of the sub‐tropical areas along the Caspian coast. Therefore, it is reliant on investment into its irrigation systems to maintain crop yields. The most important crops are wheat, rice, other grains, sugar beets, fruits, nuts, cotton and tobacco. Iran is the dominant producer of pistachio nuts in the world. Land is mostly privately owned, following land reforms late in the Shah’s rule.
Local sourcing will be important. Food self‐sufficiency is an important near‐term goal of the current administration. It has overturned the ban on the use and development of GM crops imposed by the Ahmadinejad government in 2005. The main imports by weight are soybean oil, meat, palm oil and bananas. By value, the main imports are maize and soybean cake.
Aviation
Freight and passenger potential. The aviation sector has been particularly hard hit by sanctions, with the result that Iran has a very old aircraft fleet. However, once sanctions are lifted and the county opens up there will be demand and opportunities within the air travel industry, for both passenger and freight. Since Iran will not want to concede market share to foreign carriers, it will need to expand its fleet of aircraft. The country currently has a fleet of 215 planes averaging 25‐years old, including the world’s oldest passenger Boeing 747, which is 29 years old. The deputy head of the Civil Aviation Organization of Iran has talked about buying a further 300 aircraft over the next five years.
Three main Iranian carriers. These purchase plans, to be evenly spread among Iran’s three main carriers, will require a great deal of resources in terms of training and management. It could transpire that the purchase plans will need to be slowed down in order to absorb the new technologies and practices associated with modern air planes. In the meantime, any boom in foreign travel is likely to be an opportunity for foreign carriers.
Opportunities. The government has already said that the industry needs to buy approximately 30 new commercial aircraft annually for a decade or more, at a cost of US$7.5 bln. That is clearly a big under‐estimate if the economy develops as expected.
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Consumer sectors
Very young population. With a population of close to 80 million, 65% of whom are under 35, Iran offers an attractive market to any consumer firm. About half the population has internet and mobile access, and there is already a home‐grown e‐commerce sector. Clearly, re‐connection to SWIFT and the lifting of sanctions will increase opportunities for cross‐border trade. As of 2013, the World Bank estimated that PPP‐adjusted GDP per capita was about US$7,000, making Iran an upper‐middle income country.
Market worth almost US$150 bln per annum already. In 2012, Iranians spent US$75 bln on food, US$20 bln on clothes and US$18.5 bln on tourism (Central Bank of Iran data), despite the sanctions and tough economic conditions.
Foreign companies will face plenty of clones. The existing consumer sector is largely home‐grown, with clone versions of Apple stores, Starbuck’s coffee, Victoria’s Secret and Pizza Hut, to name but a few. This will presumably raise issues when the Western originals enter the market, and will be a test of Iran’s commitment to the protection of intellectual property rights.
Mash Donald's: One of the Many Cloned Western Brands in Iran Today
Source: Chicagnow.com
Underdeveloped retail sector. Supermarkets/Hypermarkets account for an estimated 4.2% of Iranian grocery retail, open markets and street traders account for 29% of the market, which clearly leaves room for growth in the retail sector along the lines of that seen in Turkey over the past decade. The overall share of modern trade in the food retail sector is 18%, against 40% in Turkey and 65% in both Russia and China (McKinsey). This clearly leaves plenty of room for modern‐format foreign retail chains to invest in the market, although presumably existing operators in the Gulf states will be the best positioned to take advantage of this given they already have logistics in the region. Given the difficulties of starting new projects in such an environment (see our discussion on construction permits), a partnership with a Bonyad (religious fund) would also seem to pay dividends.
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IT, Internet and communications
Refer to Appendix 4, page 51, for a schematic of the media sector in Iran
Low usage of mobiles, especially smart phone technology. Iran lags behind most of its neighbors in terms of mobile penetration, and has not yet reached 100 percent. This is likely because sanctions have restricted imports of the mobile broadband equipment needed to drive smartphone adoption. General restrictions on the Internet have probably also limited growth potential in mobile telecoms and smart phones. The first LTE network was only introduced in late 2014.
Opportunities. The sector is almost fully owned by the state or by groups close to the government. That leaves it very difficult for foreign entities to enter the mobile telecoms market. The best opportunities are likely to be:
Providing equipment to upgrade and expand the mobile network,
Supplying smart phones.
Mobile Cellular Subscriptions, per 100 people (2014)
200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 . ld a . n ia r p ion p io b rates Re n India Iraq Re at ra Wo Baltics Chin U ic er i A b Emi an d ra the Arab e azakhstan ud A ab t, p Islam K Fe a r p ro n S A and y u a E ssi Eg Iran, u R United Europe
Central
Source: World Development Indicators
Internet penetration also lags behind other nations. The above data is from the World Bank, which tends to use ITU statistics. Official statistics paint a rosier picture of 50% penetration, but their methodology has been criticized for double counting. The low reported penetration is mainly because of filtering which has throttled download speeds and made usage cumbersome. However, whatever the number of users, they are active, as reflected in the more than 20,000 online stores registered in the country.
Local providers will be tough to dislodge. The obstacle for international companies looking to enter this universe is that Iran has developed domestic analogues in many of the usual growth areas, e.g. local provider “Apart” provides services similar to YouTube, “Esam” is similar to Amazon and eBay, while “ZarinPal” is the similar to PayPal. The government has said that it is open to international companies, such as Google, but provided they are “willing to accept Iranian cultural rules and policies”.
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Internet Users, per 100 people (2014)
90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
ld s cs a . n ia q . n n ia r te ti in ep io d ra ep ta io b o ra al h R n In I R s at ra W i B C b U ic kh r A b m e ra n a de i a E h A a am az e d Ar b t , pe sl K F au ra d pt o , I n S A an y r n ia d e g Eu ra ss te p E I u ni ro R U u l E ra nt Ce
Source: World Development Indicators Real estate and construction
Toughest bureaucracy. The real estate and construction sectors are notoriously bureaucratic and, according to many surveys, the most rife with corruption (see Business Climate section on page 27). The sector is currently mostly driven by government infrastructure projects and housing.
Undoubted potential. That said, given what has been seen elsewhere across the Middle East, and especially across the other side of the Gulf, there are great expectations that this will be one of the most lucrative sectors for strategic investors in the coming decade or two. The very ambitious projects already announced include:
745 km of new toll roads
5,626 km of highways
2,970 km of other main roads
US$2.5 bln has been allocated for two new terminals at Tehran airport
US$23 bln has been allocated for the completion of the Gorganincshe Noroun Railway
US$14 bln for water projects
US$5 bln to upgrade the wastewater treatment infrastructure.
A major upgrade required in hotels and business‐tourist travel facilities. Iran’s hotel industry has suffered years of neglect and there is little on offer, neither in terms of numbers nor quality. According to TBI Consulting, Tehran only has 96 hotels (there are 660 in Dubai) and only 16 of those are classified as four or five star.
Housing infrastructure. It is also widely accepted that the country is in need of a major housing upgrade. That implies increased demand for furniture, fittings, DIY stores, etc.
14 Iran Country Profile
Transport & logistics
An important link in China’s ambitious plans. In addition to the upgrade of existing transport infrastructure (see above), Iran is also positioned to be an import hub in China’s ambitious Maritime Silk Road project. A rail link from Turkmenistan to northern Iran has recently been completed and the plan is to extend this to a port on the Gulf of Oman.
Opportunities. The list basically includes the full supply‐chain infrastructure, both in terms of upgrade and expansion:
Freight wagons and locomotives
Rail infrastructure construction
Design and management services
Toll road construction and operation
Warehousing – including specialty warehousing
Handling equipment in logistics centers
Software
Trucks
Port equipment
Port management systems.
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Investment risks
Specific risks. Apart from the usual developing economy risks and the vulnerability of the economy to the oil price, there are some additional risks which strategic investors in Iran will have to address:
The major problem is that a large part of the existing economy is directly and indirectly controlled by the Revolutionary Guard (see separate comment below), and other state‐associated groups. In some instances, they may wish or need to create JVs with foreign companies. In others they will block entry or attack a competing business later. Strategic investors need to be aware of the existing competition and who stands behind them.
Where JVs are considered, there is the question of reputational risk. A big international brand may be reluctant to be associated with a company ultimately owned by the Revolutionary Guard, in case that fact later becomes public.
Similarly, foreign investors need to be aware of the positions of individuals and companies they wish to deal with, as many will remain on international sanctions lists.
The UN has made it clear that if it is not satisfied Iran is fully compliant with the nuclear deal then sanctions will “snap back” very quickly. That could catch out many strategic investors and will certainly be a reason for many to adopt a prudent and cautious approach to market entry.
Bureaucracy and corruption in some sectors is very bad (see Business Climate section on page 27)
The market, especially the consumer and machinery/electronics parts markets, are dominated with replicas and clones of international brands. It will be tough and expensive to dislodge them.
Intellectual property protection is very weak.
Strategic industry rules are well known. In the oil and gas and other so‐called “strategic” sectors, the “rules of the game” are expected to follow those already well‐known in other countries, such as Russia, Central Asia and other Middle East states. The safe way to participate is jointly with an established and powerful state entity rather than trying to compete with one.
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The Revolutionary Guard in the economy
Refer to power structure diagram on page 35
Business interests of the security forces. The Iranian Revolutionary Guard comprises the armed forces and security forces of the Iranian state. It also controls significant economic assets, either directly via Khatam al‐ Anbiya (its economic arm) and Ghorb (a construction company), or via one of the Bonyads that it controls. Ghorb is estimated to employ about 40,000 people, and is sanctioned because of its role in constructing defense facilities. In addition, the Revolutionary Guard controls Oriental Oil. It is noteworthy that in 2011 the commander of Khatam al‐Anbiya was appointed Minister of Oil. The Revolutionary Guard also won control of the main telecoms monopoly when it was privatized, jointly with two Bonyads.
Prime position. The original idea behind Khatam al‐Anbiya was that it would mobilize conscripted recruits for construction projects; however, it ventured into other fields. It is now one of the largest contractors in the country, and is generally first in line for any major contract to be allocated by a state‐owned company.
Revolutionary Guard dominates major projects. Given the Revolutionary Guard’s power it is to be expected that it would wield this for economic gain. It mainly applies this to construction contracts, especially in the oil and gas sectors. One could argue that this is a form of taxation, appropriating the surplus from these projects to fund national defense. We have looked for examples of the Revolutionary Guard’s abuse of power for economic ends, and the one continually cited is the takeover of Imam Khomeini airport in Tehran in 2004. The airport was being constructed by a consortium involving a Turkish and an Austrian company, but they were expelled. Although this is clearly an abuse of property rights, it seems to be an isolated incident linked to specific security issues.
State within a state. The Revolutionary Guard is best seen as a state within a state, rather than as a state body acting in private interests. It will act to protect its own interests. Like the KGB in the late Soviet times, this does not necessarily mean it is anti‐reform, as it understands that a military cannot be strong if the underlying economy is weak. This means that they have accepted the nuclear deal, for the moment, because without it the regime will be weakened, both in terms of its access to economic resources, and its support among the population.
Represents a major uncertain factor for the future. That said, the Revolutionary Guard grew to its current strength as a center of resistance to the reforms of the Khatami era, manifesting that opposition by reportedly murdering reform intellectuals. They intervened in the 2009 presidential election to ensure that Ahmadinejad was returned as president. This led to a disputed poll and mass protests by the Green Movement, which was suppressed by the Revolutionary Guard. This raises the question of how long the Revolutionary Guard will tolerate President Rouhani’s current plan to reduce Iran’s isolation and to reform the economy. It seems inevitable that there will be some symbolic acts by them to reassure the conservatives that Iran is not moving too far from the principles of the revolution, although it seems unlikely that anything will be done to undermine the Joint Comprehensive Plan of Action between Iran and the P5+1 group.
Stock market
Second‐largest stock market in the region. The Tehran bourse is the second‐largest exchange in the region by traded volumes. In 2000, the Central Bank started issuing licenses for the establishment of new banks and banks which emerged from the state‐owned banks privatized in the 1990s. Foreign banks are permitted to open branches or subsidiaries in one of Iran’s free economic zones, or alternatively a new bank can be established with foreign ownership.
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Tehran Stock Exchange Index, 2000‐15
90,000 80,000 Tehran Stock Exchange Index, 2002‐15 70,000 60,000 50,000 40,000 30,000 20,000 10,000 ‐ 2002 2003 2004 2005 2006 2007 2010 2012 2013 2014 2015
Source: Central Bank of Iran
Practically no foreign presence in the Iranian stock market. The Tehran Price Index (TEPIX) is a key performance indicator for the TSE. Over 300 companies are listed on the exchange. Various types of bonds and papers are traded, including ‘Justice Shares’ and so called ‘Participation papers’, a kind of sukuk (Islamic bond), which gives the holder the right to a share in the profits of companies which have been privatized. Currently, Iranian petrochemical companies account for over a quarter of the combined weighting of the Tehran stock market by capitalization, the financial sector makes up 12%, metallurgy 12% and telecoms about 6%. The top five listings account for almost 30% of the market value of the exchange. Foreign investments only accounts for 0.1% of the stock exchange’s market capitalization. The TSE has an average daily turnover of US$1 bln.
Tehran Stock Exchange By Numbers* Total market value, US$ bln $93.8 Average daily turnover, US$ bln $1.0 Total market P/E (forward) 5.7 Source: Turquoise Capital * 30 September 2015
Iran's Largest Listed Companies* MCap, US$ mln % of total Mcap Persian Gulf Petroleum Industry $8,800 9% Mobile Communications of Iran $4,625 5% Tamin Petrochemical Co $3,851 5% Telecomunication Co.. Of Iran $3,543 4% Passian Oil & Gas Co. Development $3,387 5% Source: Turquoise Capital * 30 September 2015 Sharia compliant debt issues. The government recently announced that it plans to raise US$300 mln through the issue of Sharia‐law compliant state‐treasury bills. The state has previously issued treasury bonds to contractors instead of cash payments, and then made them available on the OTC Fara Bourse.
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Economy
Survived isolation & sanctions. During 2000‐09, Iran’s GDP CAGR remained as high as 5.4% per annum. Sustained oil‐price growth was a key driver, as GDP increased by 6.6% YoY in 2010 and a further 3.7% YoY in 2011. However, GDP dynamics turned negative in 2012 and 2013, before returning to growth of 1.5% YoY in the fiscal year to end‐March 2015, according to World Bank estimates. GDP is projected to grow by 0.6% YoY in the year to end‐March 2016.
Real GDP, % Change YoY
10 Real GDP % change 8
6
4
2
0
‐2 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14E 2014/15E 2015/16E
‐4
‐6
‐8
Source: Central Bank of Iran
GDP and consumption. The structure of GDP has remained broadly unchanged over the past decade: industry (over half coming from oil) contributed 40.7%, services accounted for 50.3% and agriculture made up 9.1%. The latter remains the least efficient sector of the Iranian economy, as it accounts for 16% of the labor force. For comparison, industry (including the oil sector) employs 35% of the workforce and services accounts for 49% of the country’s employment. About two‐thirds of Iran’s GDP is spent on consumption, with over half attributable to private consumption and 11% to the state portion. Utility services (including payments for water and fuel) account for 29% of total private consumption (the largest private cost item), just below 25% is spent on food, 5% is spent on clothes, and 10% and 9% go towards healthcare and transport. The key budget expenses are: education (12%), defense (10%) and transfers to municipalities (about 9%).
GDP Structure (2014) Household consumption 52.9% Government consumption 11.2% Investment in fixed capital 28.1% Investment in inventories 1.1% Export of goods 38.0% Import of goods/service ‐17.1%
By sector of origin: Agriculture 9.1% Industry 40.7% Services 50.3% Source: Economist Intelligence Unit
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Agriculture is a big employer. Agriculture employs almost one in five members of the workforce, which is why the government has been focusing a lot of efforts in this area.
Workforce by Industry Agriculture 16.3% Industry 35.1% Services 48.6% Source: Central Bank of Iran Youth unemployment is high. Official unemployment was less than 11% at the end of 2014, and it is expected to conclude 2015 below 12%. However, there is widespread suspicion these figures are understated. Unofficial estimates cite the rate closer to 20%, with a much heavier concentration amongst those under 30‐ years‐old.
Unemployment, % of Active Population
Source: Central Bank of Iran Officially the consumer sector is worth US$20 bln per month. The total value of consumer spending in the country is officially measured at US$66 bln per quarter. However, this number greatly understates the real figure, as it does not properly account for spending in the grey areas of the economy.
Consumer Spending in Iran on a Quarterly Basis, rial bln
Source: Central Bank of Iran
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Balance sheet
Low debt burden. Iran has a low sovereign debt load which is estimated at around 11% of GDP. The obvious reason is because of sanctions, which have largely blocked the country from accessing new debt on international markets. This means that the country has plenty of scope to increase debt financing once the sanctions are removed.
Surplus current account. The country’s current account is in surplus because of the relatively low volume of imports. For the year to end‐March 2016, the current account surplus is expected to be low, at 0.4% of GDP, because of the substantial oil price collapse and the fact that imports were already low in recent years as sanctions increased.
Current Account, % of GDP
Source: Central Bank of Iran
Government funding
Budget process. Iran’s budget system has not changed much in the last fifty years or so. The state budget consists of a “development budget” and a “current budget”, the latter accounting for about 80% of budget expenditure. As a rule, the Iranian state budget is approved following a series of debates in the Majlis (Parliament), and like any law, it is approved by both the Majlis and the Guardian Council (a kind of Supervisory Board or Upper Chamber), which consists of 12 lawyers (6 faqihs and 6 jurists). The Expediency Council takes the final decision in case of disagreement between the Majlis and the Guardian Council, acting as an arbiter for the different branches of power. Generally, the annual budget indicators are based on five‐ year plans and Iran’s Twenty‐Year Perspective (Economic) plan (till 2025).
Oil price decline hits revenues. Up until 2013, the Iranian budget ran a surplus. However, that changed in 2014 when budget revenue (US$60.5 bln) fell below expenditures (US$63.3. bln), implying a budget deficit of below 1% of GDP.
Budget revenues. Oil revenues along with taxes remain the key sources of revenues for Iran’s state budget income and are calculated based on prices approved by the Majlis, with the difference topped up (or subtracted) in favor of the Stabilization Fund and National Development Fund (20% of oil revenues). The Majlis is due to preside over a government proposal to transfer all oil revenues to the National Development Fund.
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Iran Budget Revenues, rial, bln
Source: Central Bank of Iran Budget expenditures. A significant chunk of “current budget” expenditures is spent on subsidies for state‐ controlled enterprises, pricing controls (8‐10%) and social payments. A very complicated and fragmented pension system provides pensioners with decent living standards. Defense spending does not exceed 8% of the budget. Healthcare spending is rising and its share of GDP now amounts to 5‐7%. As a result, only 40% of Iran’s medical services and healthcare expenses are financed by households. In 2009‐10, 20% of state budget expenditures were education related, equating to 5% of GDP; in 2013, that ratio decreased to around 4%. Taxation. The tax structure consists of direct taxes, which account for around 70% of the total, with the balance coming from indirect sources. Up to 40% of direct taxes are collected from state‐controlled enterprises. As for indirect taxes, import duties dominate the structure, but over the past year the importance and share of VAT, introduced in 2009, has also increased. The tax contribution to GDP in Iran remains low, relative to other countries, including emerging markets. The corporate profit tax is set at 25%. There are a lot of tax exemptions; for instance, manufacturers and mines located in less developed provinces get a tax exemption for the first 10 years of operations. Income tax. Personal income tax is calculated on an incremental basis and ranges from 10% (for monthly income above US$490) to 35% (for earnings in excess of US$10,000 per month). Monthly earnings of less than USS490 are exempt from income tax. On a positive note, income tax legislation calculates taxes for both corporate income and their shareholders at a fixed rate of 25% (earlier, the income tax rate was fixed at 10% and in addition to that, the incremental tax rate reached 54%). There is an additional exemption equal to 10% of taxes accrued by corporates listed on the Tehran Stock Exchange. Iran Budget Balance, % of GDP
Source: Central Bank of Iran
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Central Bank
Flexible currency approach. The Central Bank, which tightly manages the currency market, has allowed the rial to depreciate in order to compensate for the falling oil price and lower revenues as a consequence of that. This flexible approach has prevented the economy from slipping into a steeper recession in 2015.
Iranian rial v US dollar
Source: OTC Interbank
Interest rates – hawkish response. The benchmark interest rate was raised from 14% to 21% at the start of 2015 in order to try and prevent inflation from again spiking higher. As recently at 2013, the rate of consumer inflation reached 30% per annum and was deemed to be one of the reasons for the social unrest. Headline inflation ended the fiscal year to end‐March 2015 at 15.5% and it is expected to end the 2015‐16 financial year closer to 14%. The government has used some price controls as part of its mechanisms to control inflation.
Iran Inflation Rate, % YoY
Source: Central Bank of Iran
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Oil & Gas
Crude oil is the main export. Iran’s oil exports returned to modest growth in 2014, to reach US$96 bln. This was helped by the start of negotiations between Iran and the P5+1 group, which consists of Russia, China, US, UK, France and Germany and because, in 2013, Iran’s oil exports halved to 2.3‐2.5 mbd. Hence, the increase in 2014 was more because of the low base effect. Crude oil remains a key export for Iran and is shipped by tankers via terminals located in the Persian Gulf (Kharg Island, Lavan Island, Sirri Island, Abadan and Bandar Abbas). Key markets for Iranian oil and gas exports include China, accounting for 27% of crude exports, Turkey 11% (including gas), India 11% (mainly oil), Japan 7% and South Korea 6%. Iran Oil Output, Million Barrels Per Day
Iranian Oil Output, mbd, 1980‐2014 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 ‐ 1980 1990 1997 1998 1999 2000 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BP, Statistical Review of World Energy Gas potential. Iran has one of the largest deposits of gas in the world, almost on a par with Russia’s reserves. However, Iran recently agreed to import gas from Turkmenistan in order to supply its planned economic expansion. Iran plans to expand its gas transportation infrastructure within the next 10 years, with an eye on the export market, particularly Europe. To fully develop the country’s potential as a major gas exporter will require huge investment and take about 10 years. The Iran‐Pakistan‐India gas pipeline project, “Mir”, and Iran’s participation in other gas transportation projects, frozen because of the sanctions, are likely to start being implemented shortly. Iran is also interested in attracting Russian companies to explore its natural gas deposits. It is especially interested in attracting Russian investment to South Pars, the largest undeveloped gas field in the world. Iran Gas Production, Billion Cubic Meters Per Annum
180 Iran Gas Production, bcm p/annum 160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: BP, Statistical Review of World Energy
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Technology is in high demand. There is a large focus on state and foreign investment. Key Iranian imports include basic machinery and defense equipment as well as technology and components for the manufacturing industries. Iran imports goods mainly from its key export partners mentioned above. During the past decade, over one‐third of Iran’s imports have been shipped via the United Arab Emirates, many of which are of EU and US origin. Prohibitive restrictions are imposed on imported goods that contravene Islamic principles. After international sanctions were introduced, Iran took measures to reduce imports of luxury and other high‐ priced goods. At the moment, the Iranian government is reviewing import duties and the list of prohibited goods imported into the country – changes to the list will be subject to the lifting of sanctions.
Key Oil & Gas Production Facilities in Iran
Source: University of Texas
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Impact of sanctions
Refer to Appendix 1 on page 38 for the schedule and timeline for sanctions removal as a result of the nuclear deal.
There has been an almost total ban on US‐Iran trade. The US has banned virtually all trading activity with Iran, except for items such as medicines based on humanitarian grounds. The US trade sanctions started in 1979, becoming broader in 1995, and further expanded in 2005, when measures were taken to restrict access to the US financial system. The 2011 sanctions were designed to prevent the export of petroleum products to Iran, which then imported about 30% of its refined gasoline requirements because it lacked modern refineries (mainly as a result of other sanctions).
Four steps to the imposition of sanctions. The four stages of UN sanctions were imposed as follows:
Sanctions resolutions. Under resolutions 1737 (2006), 1747 (2007), 1803 (2008) and 1929 (2010), the UN Council adopted measures against the Islamic Republic of Iran. These measures included but are not limited to:
An embargo on the proliferation of nuclear and ballistic missile sensitive programs;
A ban on the export/procurement of any arms and related materials from Iran and a ban on the supply of the seven categories, as specified, of conventional weapons and related materials to Iran;
A travel ban and an asset freeze on designated persons and entities. The asset freeze also applies to any individuals or entities acting on behalf of, or at the direction of, the designated persons and entities, and to entities owned or controlled by them.
Source: http://www.un.org/sc/committees/1737/
Additional EU sanctions. In addition, the EU imposed its own sanctions, echoed by Japan and South Korea, as follows:
Asset freezes and entry bans on key individuals;
No trade in nuclear‐related technology;
From 2012, all Iranian banks identified in breach of EU sanctions were disconnected from SWIFT. Also, a freeze on the assets of the Central Bank;
From 2012, an oil and gas embargo was imposed on Iran, including transport and insurance.
Others followed suit. Other sanctions have been imposed by Switzerland (including financial services), Australia, India, Canada, and Israel.
No SWIFT access. The two main elements of the sanctions are the cutting off from SWIFT and the oil and gas embargo. Most recently, the EU will follow through on the promises made in the joint action plan of 2013. This will suspend the oil embargo (including oil and transport services) and trade in gold and precious metals. The latter will help the Iranian Central Bank unlock its international reserves. The EU will also raise tenfold the financial threshold on financial transfers for non‐sanctioned trade, which will allow a significant growth in exports to Iran.
EU countries are eager to get involved. Shortly after the announcement of the agreement in July, a German government plane with a trade delegation flew to Tehran. Ministers from France, Italy and the UK have visited Iran. To some extent, this was pre‐empting the ratification of the deal by the US Congress, but it shows the eagerness of European businesses to resume trade with Iran.
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Business climate
Poor business climate. Iran features quite low in the recent World Bank Ease of Doing Business Survey and this does not seem to be the result of sanctions. Iran falls particularly short in the rankings for the protection of minority investors (150), the ease of trading across borders (167), and registering property (91). Some difficulties may improve when sanctions are lifted, but the other issues are due to institutional features that can be expected to persist after sanctions are lifted.
World Bank ‐ Iran and the CIS Country Ranking Georgia 24 Armenia 35 Kazakhstan 41 Belarus 44 Russia 51 Mongolia 56 Azerbaijan 63 Kyrgyzstan 67 Ukraine 83 Uzbekistan 83 Iran 118 Source: World Bank * Ease of Doing Business 2015‐16
Big improvement in construction permits category. Iran is ranked 118 in the survey for 2016, up one place in the revised rankings list for 2015. The biggest improvement is the 29 place jump in the “getting construction permit” category, in which Iran is now placed 69 (from 98 in the revised 2015 ranking). That is a very encouraging step given that many foreign investors are specifically focused on the huge infrastructure project potential in post‐sanctions Iran.
Some improvement in access to electricity. The other category where Iran has recorded an improvement is in the “getting access to electricity” category. In the revised 2015 survey, the country ranked 98, and now it ranks 94. While still a bad ranking, it is at least a net improvement. Electricity is an area that has suffered from underinvestment. This may be sanctions related, as one of the main issues is the length of time it takes to get materials for the connection work (the duty of the customer, not the utility). Iran has recently signed a contract with Turkmenistan to import electricity while it builds its own infrastructure.
Utilities are in a poor state. The other main issue is the long duration and cost of connecting to sewerage and water infrastructure which is likely related to underinvestment in such utilities. This may be a funding issue, but it is more likely to be a structural issue at the city level, given that we are talking about the capital city, which would normally be a priority for funding.
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World Bank Ease of Doing Business in Iran Starting a new business Registering property Getting credit Rank 87 Rank 91 Rank 97 Procedures 8 Procedures 7 Legal rights index (0‐12) 2.0 Time (days) 15 Time (days) 12 Depth of credit Info (0‐6) 7.0 Cost (% of income/capita) 2.7% Cost (% of property value) 6.1% Public registry coverage (% of adults) 49.1% Min capital (% of income/capita) 0.0% Quality of land administration (0‐30) 15 Private registry (% of adults) 46.6%
Construction permits Enforcing contracts Protecting investors Rank 69 Rank 63 Rank 150 Procedures 15 Procedures 17 Extent of disclosure (0‐10) 7.0 Time (days) 97 Time (days) 505 Extent of Director liability (0‐10) 4.0 Cost (% of warehouse value) 2.1% Cost (% of claim) 17.0% Ease of Sharholder suits (0‐10) 1.0 Building quality control Index (0‐15) 8.5 Quality of judicial process (0‐18) 6.5 Strength of investor protection (0‐10) 4.0
Paying taxes Trading across borders Getting electricity Rank 123 Rank 169 Rank 88 Payments per year 20 Export Border Compliance (hours) 107 Procedures 6 Time (hours) 344 Cost of export border complince ($) 565 Time (days) 77 Total tax payment, % 44.1% Time for documentary compliance (hours) 159 Cost (% of income/capita) 823.4% (Labor tax contributions rate) 25.9% Import Border Compliance (hours) 148 Reliability of supply index (0‐8) 5 (Profit tax) 17.8% Cost of Import border complince ($) 284 Time for documentary compliance (hours) 197 Source: IFC, World Bank. * Ease of Doing Business 2015‐16
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Iran Country Profile
Registering property is another shortcoming that is not directly affected by sanctions. Iran has slipped two places, to 91, in the latest survey, although only seven procedures are now required from nine in the survey for 2015. These procedures take 12 days (down from 35 days) and the cost is 12% of the property value, one of the highest in the region, against 0.2% in the United Arab Emirates. Most of this cost is property taxes, including a 5% transfer tax.
On protecting minority investors
Not as bad as it appears. Although Iran ranks 150 in the survey for protecting minority investors, a deeper dive into Iran’s minority investor issues reveals that the situation is not as bad as it seems. The “Ease of Doing Business Survey” is looking for abuses of minority rights that are common in more advanced markets. These are less of an issue for investors in frontier markets who are looking out for much more egregious abuses of property rights that would be unthinkable in a more advanced market. For instance, investors are less worried about whether the CEO and Chairman of the Board is the same person, than whether assets can be wholesale expropriated from the company by either the government or company insiders.
Pressure will increase to improve as the market opens. Against that background, Iran has relatively advanced minority protection rights in that it scores fairly well on shareholder rights, disclosure and transparency. Its main shortfalls are in the strength of governance structures, because of the lack of a requirement for independent directors or that the CEO is not barred from serving as Chairman of the Board. Obviously these would be desirable and no doubt companies without these requirements will trade at a discount, but it is not a reason to condemn the entire system. The other low score is in the ease of shareholder suits, which are again something of a luxury for investors in frontier markets. And in any case, the problems seem to stem from issues of general judicial practice rather than the lack of protection of minority rights – the lack of rights apply to all plaintiffs, not just those in shareholder suits.
Index of Economic Freedoms: Iran, the CIS and Mongolia Rating Position* Score Change from 2013 Georgia Mostly free 22 73.0 0.4% Armenia Moderately free 52 67.1 ‐1.8% Kazakhstan Moderately free 69 63.3 ‐0.4% Kyrgyzstan Moderately free 82 61.3 0.2% Azerbaijan Moderately free 85 61.0 ‐0.3% Mongolia Mostly unfree 96 59.2 ‐0.3% Tajikstan Mostly unfree 140 42.7 0.7% Russia Mostly unfree 143 52.1 0.2% Belarus Repressed 153 49.8 ‐0.3% Uzbekistan Repressed 160 47.0 0.5% Ukraine** Repressed 162 46.9 ‐2.4% Iran Repressed 171 41.4 1.5% Turkmenistan Repressed 172 41.4 ‐0.8% Source: Heritage Foundation * out of 178 ranked countries ** based on previous regime and pre‐2014 changes
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Corruption perception is poor … but no worse than Russia. The table below shows Iran’s ranking in the latest Transparency International Corruption Perceptions Index. The country ranks equal to Russia and just below Kazakhstan, i.e. nothing exceptional for an early stage oil economy.
Corruption Perception Index: Iran, the CIS and Mongolia* 2014 ‐ Score Position* 2013 ‐ Score 2012 ‐ Score Georgia 52 50 49 52 Mongolia 39 80 38 36 Armenia 37 94 36 34 Belarus 31 119 29 31 Azerbaijan 29 126 28 27 Kazakhstan 29 126 26 28 Iran 27 136 25 28 Kyrgyzstan 27 136 24 24 Russia 27 136 28 28 Ukraine 26 142 25 26 Tajikstan 23 152 22 22 Uzbekistan 18 166 17 17 Turkmenistan 17 169 17 17 Source: Transparency International * 175 countries in the survey
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Social
Iran’s population has been growing steadily and is now thought to be close to 80 million. That is the largest in the Middle East and underscores the economic potential once the country opens up. According to official Iranian statistics, at the beginning of 2015 the population totaled 78.4 mln (81.8 mln according to IMF data as of July 2015).
Population, mln
90 Iran Population, 1994‐2014 80 70 60 50 40 30 20 10 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014
Source: IMF Large youth population. The average age of the population is 28, with the share of youth aged 14 years and younger at 23.7%, 15‐24 years – 17.6%, 25‐54 years – 46.8%; 55‐64 years – 6.8%; older than 65 years – 5.3%. The high rate of population growth (over 3% per annum) after the Islamic revolution had slowed to 1.2% YoY by early 2000. Thus, Iran passed the demographic transit stage, accompanied by a decreased death rate, and has been able to improve life expectancy to 74 years on average. The urban population accounts for 77.5% of the total.
Daniel Barenboim and the Reformed Tehran Symphony Orchestra
Source: The Guardian newspaper
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Education and literacy. The overall population literacy stands at 87%, including 82% for women. The rate of people with third‐level education (including women) is also high, with the share of women reaching 51% according to some estimates. The active population (employed and officially unemployed) is about 24 mln, equating to 30.7% of the total. The situation in the labor market remains quite tough though, especially for professionals and specialists with higher education as well as skilled workers. The official unemployment rate exceeds 10%, with a particularly high concentration of unemployment among youths aged 15‐29 years old, where the rate exceeds 20%.
Cityspace Tehran
Source: BoundlessWorld
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Political system
Unique state headed by a religious leader. Iran is unique in the modern world in that it is headed by a religious leader, the Rahbar or Velayat‐e Faqih. The clergy also hold key positions in the government. Iran is an Islamic Republic as defined by the 1979 Constitution. Since 1979, Iran’s political system has been guaranteed by its constitution, and has not changed much since then. The political system is represented by a combination of the republic’s administrative and religious authorities, which sometimes have duplicating and overlapping functions.
Head of state. The country is headed by the Rahbar, the Supreme Leader of Iran, who is elected by the Assembly of Experts. After the death of Iran’s first Supreme Leader Ayatollah Khomeini, his successor, Rahbar Ali Khamenei kept a relatively low profile during the presidencies of Akbar Hashemi Rafsanjani (Iran’s fourth president, 1989‐1997) and Mohammad Khatami (Iran’s fifth president, 1997‐2005), however during the presidency of Mahmoud Ahmadinejad, the sixth president of Iran in 2005‐13, Khamenei’s role as the country’s Supreme Leader, and to a large extent an arbiter for various branches of power, increased.
The Rahbar is a key policy maker. Currently, under President Hassan Rouhani, Khamenei plays an active role in forming the country’s politics. The Rahbar has an enormous administrative staff whose members are present across all branches of power from top political authorities down to universities and schools. The Rahbar is the head of state and the highest ranking political and religious authority in Iran. Ali Khamenei is a Marja‐e‐taqlid, the highest ranking cleric and authority on religious laws both for Shiites living in Iran, and for those in other countries. His fatwas are mandatory for all Shiites.
Clergy in Iran. The Iranian clergy has been traditionally proactive in participating in the country’s politics. This is explained by the special structure of the Shi’a hierarchy where members form various alliances, similar to political parties. After the suppression of the Iranian ‘Green Movement’, which had protested against the results of the 2009 presidential elections, the activity of such associations has not been so pronounced, but, undoubtedly, the groups remain influential. Given the long and extensive historical background, Iranian clergy quickly adapt to changes in the social, political and economic life of the country.
The president. Although the Rahbar is the head of state, and has significant powers, it is the president who increasingly wields the decision‐making power in the country. The interaction between these two offices is important for the progression of Western‐style reforms in Iran, although it should not be simplified into an assumption that the clerical powers are anti‐reform and the secular powers are pro‐reform.
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President Term of Office Cause of leaving office
Abolhassan Bani‐Sadr 1980‐1981 Ousted, exiled
Mohammad Ali Raja’i 1981‐1981 Assassinated
Ali Khamenei 1981‐1989 Elevated to Rahbar
Akbar Hashemi Rafsanjani 1989‐1997 Lost election
Mohammad Khatami 1997‐2005 Lost election
Mahmoud Ahmadinejad 2005‐2013 Lost election
Hassan Rouhani 2013‐present Incumbent
Fragmented political party system. The political parties are usually set up around a particular political leader, and become active during the presidential or parliamentary pre‐election campaigns, representing the interests of the candidates and the state or religious factions supporting them.
Balance of power. The current Iranian President, Hassan Rouhani, enjoys strong support from the Rafsanjani faction and the majority of the Khomeini bloc. The Ali Khamenei (Supreme Leader) group also supports Rouhani. The Larijani faction also has strong positions: Ali Larijani is an Iranian Majlis Speaker, and his brothers hold different positions in government. The opposition had been very active under ex‐president Ahmadinejad, and is now is viewed as more centric and liberal.
Loyal opposition. The opposition groups in Iran are not interested in overthrowing the regime, but rather to evolve the current system and liberalize economic policy to make the political system more democratic. Within the mandate of Islamic governance, these targets assume a gradual decrease in the importance of the Rahbar’s authority and the Guardian Council, as well as a shift away from Islamic principles in law.
The Bonyads are both political and economic players. These are non‐official structures which were established following the Islamic Revolution when the Bonyads became the owners of major nationalized companies and land. The Bonyads play a large role in the economy and politics of the country by serving as consolidators of certain religious‐financing groups.
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Waqfs (a form of trust fund). Another important player is the waqfs, the largest of which is Astan Quds waqf in Mashhad. Waqfs are a form of trust fund established so that their use and income can be directed for the benefit, mainly of the religious community, but also for public works in general. Waqfs and Islamic funds have, in essence, tax immunity and a lot of preferences. Given their exposure to the largest Iranian commercial companies, the position of the funds within the economy of Iran is quite strong.
Consolidating the religious center. Iran has large geopolitical potential in which to play a more active role as a global religious center for Shiites. Ethnic‐wise, the population of Iran is diversified and Persians, the largest group, make up about 65%. The largest ethnic minorities include Azerbaijanis (16% share) and Kurds (7% share). The country faces some separatist issues as many minorities populate border areas close to their fellow ethic groups: Azerbaijani, Turkmen, Kurd, Arab and Baluch. As for religion, 99% of the Iranian population is Muslim, including 90‐95% Shiite.
Religious centers. Religious centers located in Iran have a large influence on domestic politics too. The largest one is Qom, where dozens of educational centers are located and which greatly influence both domestic external political policy, especially with regards to countries with Shi’a populations.
Political Power Structure in Iran Revolutionary Guard President Supreme Leader Judiciary (Rahbar) Government Bonyads Appoints 6 Jurists Chooses Chooses Candidates Guardian Council Assembly of Experts Chooses Appoints 6 Candidates Lawyers Parliament
Electorate
Source: Macro‐Advisory Ltd
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Foreign policy
Geopolitical influence and significant stabilizing role. Iran is a member of the Islamic Development Organization, Islamic Development Bank (IDB) and the regional Economic Cooperation Organization (ECO), which also includes Turkey, Pakistan, Afghanistan, and seven ex‐Soviet countries in Central Asia. Iran is also an observer member of the Shanghai Cooperation Organization. It would have joined the Shanghai Cooperation Organization but for the sanctions. Although Iran’s government is in principle keen on cooperation with Muslim countries, Iran’s economic relations are much less developed with Islamic counterparts than with countries of other faiths.
Shi’a leader. Iran has emerged as a central force in Sunni‐Shi’a conflicts. Iran’s strong opposition to Israeli and US policy, its support for Hamas and Hezbollah, as well as the course of Syrian President Assad triggered the sanctions escalation. The necessity to maintain an Islamic regime of governance in the country may result in adjusting the state view regarding Syria and facilitate cooperation with the US, albeit the recent intervention of Russia adds further possibilities and uncertainties.
Israel. For now Iran shows no intention of changing its tough line on Israel, which, along with Saudi Arabia (which struggles to reduce Iran’s influence over Shiites there and across the region), remain Iran’s key competitors in the Middle East. The conflicts between Iran and these two states may create a potential threat to instability in the region. On another hand, this struggle may unite the Iranian population.
Afghanistan creates another problematic situation for Iran. Iran hopes to reduce the spillover of religious conflict with the Taliban, as well as to put‐down separatist movements in Baluchestan, by providing help to the central Afghan government. The potential launch of a gas pipeline in Pakistan via the Sistan and Baluchestan Province should help the economy there and will likely reduce opposition influences in the region.
Looking West. Since 1996, Iran has applied for membership to the World Trade Organization (WTO) on several occasions, before in 2009 becoming a WTO observer member. Iran’s geopolitical influence and its regional aspirations will be further driven by EU and US attempts to attract Iran to participate in ambitious gas projects such as TANAP (Trans‐Anatolian Gas Pipeline), to deliver gas to Europe via Turkey, and TAP (Trans Adriatic Pipeline), to transport Caspian gas to Europe (instead of Nabucco). Iranian political leaders realize that the agreement with the P5+1 group was reached because of US concessions. There are elements within the US establishment who are interested in working with Iran to help solve problems in the Middle East. The US intends to use Iran’s power and resources in the struggle against the so‐called ‘Islamic State’. Generally, the US position on regional issues does not contradict those of Iran, and cooperation between the two will enhance Iran’s international standing.
Relations with Russia. Russia’s position in the negotiation process between the P5+1 group and Iran may be assessed from different angles. However, the lifting of sanctions from Iran is the preferred scenario for Russia. Trade turnover between Russia and Iran has fallen by two‐thirds since 2011 and many joint Russian‐Iranian projects with strong economic and geopolitical potential for both countries were suspended because of the international sanctions imposed on Iran. Russia was able to restore its reputation as a powerful political ally of Iran by playing a key part in negotiating the agreement. Russian‐Iranian political relations are currently very strong.
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History
Refer to Appendix 2, page 46, for a detailed chronology of the major events in the country’s history and political development. Appendix 3, page 50, has a summary of several relatively recent books which also provide more coverage of this theme.
The Pahlavi dynasty. In 1925 the Pahlavi dynasty was established by Reza Shah Pahlavi. This brought about a shift in Iran’s economic policy towards state capitalism, as the country was modernized, the bureaucracy was expanded and its natural resources were developed. During this period Anglo‐Persian Oil Company (APOC), established in 1908, and renamed Anglo‐Iranian Oil Company (AIOC) from 1935, held a monopoly in the Iranian oil industry. However, after the overthrow of Mohammad Mosaddegh’s government in 1953 (orchestrated by the US), AOIC was replaced by International Oil Consortium (IOC), an association of several petroleum monopolies from the US, the UK, France and other countries. This left Iran itself heavily reliant on foreign capital for economic development. To facilitate this, in 1955, the Law on Attraction and Protection of Foreign Investment was adopted (which more recently served as the base for a new Law adopted in 2002).
Shah’s reforms, Islamic Revolution, nationalization. During the 1960‐70s the so called “White Revolution” reforms were launched, with the aim of bringing Iran’s economy to Western levels of development. However, the reforms resulted in forming an oligarchic capitalism, where groups with links to the “establishment” and US capital played key roles within the economy and prospered. This was accompanied by large‐scale bankruptcies among SMEs, growth in the black market and endemic corruption. This left many disappointed and dissatisfied with the Shah’s strategy of modernization. At the same time, the religious leaders started to actively explore alternative means of economic development. Iran’s economy under the Shah remained successful until the mid‐1970’s, posting annual GDP growth of 11% in real terms. However, by the end of the decade, economic growth had ground to a halt, triggering mass demonstrations and strikes, which paralyzed the economy. In February 1979, the Shah was overthrown, and an Islamic government assumed power. Islamic principles were introduced into Iran’s political and economic structures:
Foreign capital was prohibited;
International Oil Consortium (IOC) was dissolved;
Banks and the large corporations (mainly foreign‐owned entities) were nationalized;
Banking services shifted to the Islamic interest‐free principle.
Economic shift in the 1990s grows Iran into the third‐largest economy in the region. In the 1990s Iran started to open up its economy to the global market, loosening controls over pricing and launching a privatization program. As a result, the country started to attract foreign investment. During the period 2000‐ 09 Iran’s economy returned to growth supported by a period of sustained oil‐price expansion. By 2010, Iran was posting GDP growth of 6.6% YoY. Iran is now the third‐largest economy in the region after Turkey and Saudi Arabia.
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Appendix 1: Timeline for ending sanctions on Iran*
The Joint Comprehensive Plan of Action (JCPOA) was endorsed by the United Nations in July and takes effect from this month. The timeline for the lifting of sanctions under the JCPOA is listed in the chart below. Timeline for Lifting Sanctions
Source: The Brookings Institute
Under it, the EU will terminate the provisions of the Council Regulation (EU) No 267/2012 and suspend the corresponding provisions of Council Decision 2010/413/CFSP. (Member states will change national legislation to follow suit.) EU sanctions lifted include:
Financial, banking and insurance measures
prohibition and authorization regimes on financial transfers to and from Iran
Sanctions on:
banking activities
insurance
financial support for trade with Iran
grants, financial assistance and concessional loans
Government of Iran public‐guaranteed bonds
associated services for each of the categories above
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Oil, gas and petrochemical sectors
Sanctions on:
the import of oil and gas from Iran
the export of key equipment for the oil, gas and petrochemical sectors
investment in the oil, gas and petrochemical sectors
associated services for each of the above categories
Transport, metals, software sectors
Sanctions related to:
shipping and shipbuilding
the transport sector
metals
software
associated services for each of the categories above
Persons, entities and bodies
Asset freeze and visa ban measure applicable to:
listed Iranian banks and financial institutions, including Central Bank of Iran
Listed persons, entities and bodies related to:
the oil, gas and petrochemical sectors
shipping, shipbuilding and transport
proliferation‐sensitive nuclear‐arms and ballistic missile‐related activities
other listed persons, entities and bodies not related to proliferation‐sensitive nuclear‐arms and ballistic missile‐related activities
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The United States “ceases the application” of the following sanctions:
Financial and banking measures
Sanctions on:
transactions with individuals and entities set out in Attachment 3 to this Annex, including: the Central Bank of Iran (CBI) and other specified Iranian financial institutions; the National Iranian Oil Company and other specified individuals and entities identified as Government of Iran; Persons and entities involved in nuclear or ballistic missiles activities; Islamic Revolutionary Guard Corps (IRGC), Islamic Republic of Iran Shipping Lines (IRISL)
Iranian rial
provision of US banknotes to the Government of Iran
the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including government bonds
financial messaging services to the CBI and Iranian financial institutions
bilateral trade limitations on Iranian revenues held abroad, including limitations on their transfer
sanctions on associated services for each of the categories above
Insurance measures
Sanctions on underwriting services and insurance
Energy and petrochemical sectors
efforts to reduce Iran’s crude oil sales, including limitations on the quantities of Iranian crude oil sold in those nations that are still permitted to purchase Iranian crude oil
Sanctions on:
investment and support for Iran’s oil, gas and petrochemical sectors
the purchase, acquisition, sale, transportation or marketing of petroleum, petrochemical products and natural gas from Iran
the export, sale or provision of refined petroleum products and petrochemical products to Iran
transactions with Iran’s energy sector, including front companies
associated services for each of the categories above
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Shipping, ports, metals and automotive sectors
Sanctions on:
transactions with Iran's shipping and shipbuilding sectors and port operators
Iran’s trade in gold and other precious metals
the sale, supply or transfer of goods and services used in connection with Iran’s automotive sector
associated services for each of the categories above
Designations and other sanctions listings
removal of hundreds individuals and entities set out in Attachments 3 and 4 of Annex II from the Specially Designated Nationals and Blocked Persons List (SDN List), the Foreign Sanctions Evaders List, and/or the Non‐SDN Iran Sanctions Act List
The United States also commits to:
allow for the sale of commercial passenger aircraft and related parts and services to Iran by licensing the:
• export or transfer to Iran of commercial passenger aircraft for exclusively civil aviation end‐use
• export or transfer to Iran of spare parts and components for commercial passenger aircraft
• provision of associated services, including warranty, maintenance, and repair services and safety‐related inspections, for all the foregoing, provided that licensed items and services are used exclusively for commercial passenger aviation
The following United Nations sanctions are terminated, “subject to re‐imposition in the event of significant non‐performance by Iran of JCPOA commitments”:
UNSC Res 1696 (2006)
demands that Iran suspend all enrichment‐related and reprocessing activities, including research and development, to be verified by the IAEA
calls on all States to prevent the transfer of any items and technology that could contribute to Iran’s enrichment‐related and reprocessing activities and ballistic missile programs
UNSC Res 1737 (2006)
demands that Iran cooperate with and provide access to the IAEA
orders Iran to suspend all enrichment‐related and reprocessing activities and heavy‐water projects
orders all states to prevent the transfer of materials, or technical or financial assistance, related to enrichment, reprocessing, heavy water, the development of a nuclear weapon, and activities about which IAEA has expressed concern. Also bans their import from Iran.
freezes funds of designated individuals directly associated with Iran’s proliferation sensitive nuclear and missile activities
prohibits technical cooperation on “proliferation sensitive nuclear” activity
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UNSC Res 1747 (2007)
requires states to notify the UN of entry into territory of certain individuals involved in nuclear research
prohibits the import of arms from Iran
prohibitions grants and loans to the government of Iran
UNSC Res 1803 (2008)
requires states to notify the UN of the entry into their territory of certain individuals involved in nuclear research, and to prevent the entry of others
imposes sanctions on materials related to nuclear weapons and ballistic missiles
imposes financial sanctions on trade issues related to nuclear development
UNSC Res 1835 (2008)
reaffirms sanctions listed in the above resolutions
UNSC Res 1929 (2010)
prohibits foreign investment in uranium mining, uranium enrichment or reprocessing, and technology related to ballistic missiles
imposes additional sanctions on conventional arms, ballistic missiles , individuals or entities belonging or controlled by the Revolutionary Guard, or involved in ballistic missiles or nuclear weapons industries
UNSC Res 2224 (June, 2015)
extends sanctions listed in 1929 (2010) through June 2016
UNSC Res 2231 (July 2015)
re‐imposes the ballistic missiles and conventional arms embargos. The ballistic missile sanctions will be lifted on Transition Day, while the conventional arms sanctions will be lifted five years after Adoption Day
conclusion of consideration of the Iran nuclear issue by the UN Security Council 10 years after the Adoption Day
5 years after Adoption Day (October 2020)
UN sanctions on conventional arms lifted
may also occur earlier, if the IAEA reaches the “Broader Conclusion” that “all nuclear material in Iran remains in peaceful activities”
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Transition Day, 8 years after Adoption Day (October 2023)
UNSC sanctions on ballistic missiles are lifted
may also occur earlier, if the IAEA reaches the “Broader Conclusion” that “all nuclear material in Iran remains in peaceful activities”
Iran must seek ratification of the Additional Protocol on Nuclear Safeguards, which it signed in 2003 but has never formally “concluded.” (According to Iran, ratification by the Majlis is necessary for the Iranian government to conclude the Additional Protocol.)
The EU must lift the following sanctions:
prohibiting the supply of financial messaging services to, and freezing the assets of, designated individuals “involved in nuclear or ballistic missiles activities,” and “owned, controlled, or acting on behalf of” the Revolutionary Guard and the Islamic Republic of Iran Shipping Lines”
(The JCPOA references Article 20(12) of Council Decision (EU) 2010/413/CFSP. Strangely, there is no Article 20(12); perhaps this is referencing Article 20(1‐2), which would make the most sense contextually.)
requiring inspection of cargo traveling to and from Iran; prohibiting the provision of maintenance services to cargo aircraft until suspect cargo is inspected and/or seized
prohibiting the sale or transfer or financing of nuclear related materials to Iran
materials listed in the Nuclear Suppliers Group (one, two) and Missile Technology Control Regime lists
materials determined by the Security Council, the UNSC‐established Sanctions Committee, or the IAEA to contribute to nuclear enrichment or the development of nuclear weapons delivery systems
dual‐use technology as listed in Annex I to EU Regulations
prohibiting loans, credits or joint ventures with Iranian individuals or entities involved in the manufacture of materials listed in the Common Military List of the EU or technology that could contribute to nuclear enrichment or nuclear weapons delivery systems
prohibiting investments in Iran that involve uranium mining, uranium enrichment, or the manufacture of materials listed in the Nuclear Suppliers Group (one, two) and Missile Technology Control Regime lists
prohibiting the purchase and sale of precious metals to and from the Iranian government
(many of these seem to be misnumbered: for instance, there are no “Articles 4e and 4f” of Council Decision 2010/413/CFSP, and “Articles 15a, 15b and 15c” of Council Regulation (EU) No 267/2012 should be 15(1)a, b, and c)
prohibiting the sale of software and “associated services” to Iran (these also appear to be mis‐ numbered)
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prohibiting the sale or transfer of “arms and related materiel,” including military or paramilitary equipment, to Iran, and the import of arms from Iran
prohibiting technical or financial assistance related to designated materials and loans or financial relationships with any Iranian individual involved in the manufacture of such goods
freezing assets and banning visas for Iranian banks, financial institutions, individuals and entities related to “oil, gas, and petrochemical sectors,” shipping and transport, “proliferation‐sensitive” activities, and nuclear weapons and ballistic missiles
The United States must seek legislative action to effect the complete termination of:
those sanctions suspended since Implementation Day, including those targeting Iran’s financial, energy, shipping, automotive sectors and petrochemical measures
sanctions on the acquisition of nuclear‐related commodities and services (under the Iran, North Korea, and Syria Non‐proliferation Act)
sanctions on joint ventures relating to the mining, production, or transportation of uranium
the exclusion of Iranian citizens from higher education coursework related to careers in nuclear science, nuclear engineering or the energy sector
sanctions on raw and semi‐finished metals and software “for integrating industrial processes”
remove individuals and entities listed in Attachments 3 and 4 from the Specially Designated Nationals List, Foreign Sanctions Evaders list, Iran Sanctions Act List, and listed by E.O. 13382, E.O. 13608, E.O. 13622, and E.O. 13645
8.5 years after Adoption Day (March 2024)
Iran may commence testing up to 30 advanced centrifuge machines. Iran will proceed from single centrifuge machines and small cascades to intermediate cascades in a logical sequence.
Iran may begin manufacturing of IR‐6 and IR‐8 centrifuges without rotors through year 10 at a rate of up to 200 centrifuges per year for each type
Termination Day, 10 years after Adoption Day (October 2025)
UNSC resolution endorsing JCPOA terminates, as does all UNSC consideration of the Iranian nuclear program
EU terminates all remaining sanctions
Iran’s obligation to keep its enrichment capacity below 5060 IR‐1 centrifuges comes to an end
Iran can also test large numbers of, and conduct enrichment R&D with, advanced centrifuges
Iran can begin installing the necessary infrastructure for the IR‐8 at Natanz in Hall B of FEP
Iran can produce complete centrifuges at a rate of up to 200 a year
Iran’s commitment that all uranium isotope separation‐related R&D or production activities will be exclusively based on gaseous centrifuge technology ends
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15 years after Adoption Day (October 2030)
Iran’s obligation to export all heavy water beyond Iran’s needs for the modernized Arak research reactor ends
Iran’s obligation to keep uranium enrichment below 3.67 percent and 300kg ends
Iran’s obligation to conduct all testing of centrifuges with uranium at PFEP (Natanz) and all mechanical testing of centrifuges is only at PFEP and the Tehran Research Center ends
Iran’s commitment not to conduct any uranium enrichment or related R&D at Fordow ends
Iran’s commitment to limit the number, location and activity of IR‐1 centrifuges in Fordow ends
Iran’s obligation not to engage in any spent fuel reprocessing or related R&D activity, nor to acquire hot cells or facilities capable of separation of plutonium, uranium or neptunium from spent fuel ends. Iran “does not intend to thereafter” to resume these activities.
Iran’s commitment not to acquire plutonium or uranium metals or conduct related R&D ends
Iran’s commitment not to operate facilities for converting fuel plates or scrap back to UF6 ends
Iran’s formal commitment to permit the IAEA on‐line enrichment measurement and electronic seals, and to facilitate a long‐term IAEA presence through visas, working space and an increased number of inspectors ends
Iran’s commitment to allowing IAEA continuous monitoring of stored centrifuges and infrastructure ends
Iran’s commitment to allowing the IAEA regular access to Natanz ends
Iran’s commitment to obtain prior approval from the Joint Commission before engaging in enrichment or enrichment related activities with other countries ends
20 years after Adoption Day (October 2035)
Iran’s commitment to contain, and allow IAEA surveillance of, rotor tubes and bellows ends
25 years after Adoption Day (October 2040)
Iran’s commitment to permit IAEA verification that all uranium is transferred to the uranium conversion facility in Esfahan (or to future uranium conversion facilities which Iran might eventually build) ends
*Source: Brookings Institute
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Appendix 2: Chronology of key events in Iran*
Early history
550‐330 BC – Achaemenid dynasty rules the first Persian Empire. At its greatest extent under Darius I, it stretches from the Aegean Sea and Libya to the Indus Valley.
330 – Alexander the Great of Macedonia conquers the Persian Empire, founding a short‐lived empire before dying in Babylon in 323.
140 BC‐224 AD – Persia, known as the Parthian Empire, under the rule of the Arsacid dynasty.
224‐651 AD – Sassanid dynasty rules Persian Empire; Zoroastrianism is the dominant religion.
Islamic rule
636 – Arab invasion brings an end to the Sassanid dynasty and the start of Islamic rule.
9th century – Emergence of modern Persian language (or Farsi), written using a form of Arabic script.
9th‐13th century – The decline of the Islamic Caliphate, which is replaced by a series of Iranian and Turkic dynasties, including the Shi’a Buyids, the Seljuk Turks and the Empire of Khwarezm.
1220 – The Mongol forces of Genghis Khan overrun Persia, which becomes part of the Ilkhanate, ruled by descendants of Genghis' grandson Hulagu.
1501 – With the support of Shi’a Qizilbash warrior tribes, Shah Ismail I becomes the first ruler of the Islamic Safavid dynasty; Shi’a Islam is declared the state religion.
1571‐1629 – Apogee of the Safavid Empire under Shah Abbas I, who reforms the army, sidelines the Qizilbash and establishes the first diplomatic links with Western Europe.
1828 – Iran cedes control of the Caucasus to Russia after second Russo‐Persian war.
1890 – "Tobacco Riots": ruler Naser al‐Din Shah forced to withdraw trade concessions granted to Britain after mass protests.
1907 – Introduction of a constitution which limits the absolutist powers of rulers.
1914‐1918 – Iran declares neutrality but is the scene of heavy fighting during World War I.
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Pahlavi rule
1923 – Reza Khan becomes prime minister; in December 1925, the Parliament votes to make Reza Khan ruler, deposing Ahmad Shah Qajar; in April 1926, Reza Khan is crowned Reza Shah Pahlavi. Mohammad Reza, the Shah's eldest son, is proclaimed Crown Prince.
1935 – Formerly known as Persia, Iran is adopted as the country's official name.
1941 – The Shah's pro‐Axis allegiance in World War II leads to the Anglo‐Russian occupation of Iran and the deposition of the Shah in favor of his son, Mohammad Reza Pahlavi.
1950 – Ali Razmara becomes prime minister and is assassinated less than nine months into his term. He is succeeded by the nationalist, Mohammad Mosaddegh.
1951 – in April, Parliament votes to nationalize the oil industry, which is dominated by British‐owned Anglo‐Iranian Oil Company. Britain imposes an embargo and a blockade, halting oil exports and hitting the economy. A power struggle between the Shah and Mosaddegh ensues and the Shah flees the country in August 1953.
1953 – in August, Mosaddegh is overthrown in a coup engineered by British and American intelligence services. General Fazlollah Zahedi is proclaimed prime minister and the Shah returns.
1963 – in January, the Shah embarks on a campaign to modernize and Westernize the country. He launches the 'White Revolution', a program of land reform and social and economic modernization. During the late 1960's, the Shah becomes increasingly dependent on the secret police (SAVAK) in controlling opposition movements critical of his reforms.
1978 – in September, the Shah's policies alienate the clergy and his authoritarian rule leads to riots, strikes and mass demonstrations. Martial law is imposed.
Islamic Republic
1979 – in January, as the political situation deteriorates, the Shah and his family are forced into exile; in February, the Islamic fundamentalist, Ayatollah Ruhollah Khomeini, returns to Iran following 14 years of exile in Iraq and France for opposing the regime; on 1 April, the Islamic Republic of Iran is proclaimed following a referendum; on 4 November, Islamic militants take 52 Americans hostage inside the US embassy in Tehran. They demand the extradition of the Shah, in the US at the time for medical treatment, to face trial in Iran.
1980 – in January, Abolhassan Bani‐Sadr is elected the first president of the Islamic Republic. His government begins work on a major nationalization program; on 22 September, the start of the Iran‐ Iraq war, which lasts for eight years. Casualties are estimated at 1 million for Iran and 250,000‐ 500,000 for Iraq.
1989 – on 3 June, the Ayatollah Khomeini dies. On 4 June, President Khamenei is appointed as the new Supreme Leader.
1990 – in September, diplomatic ties are resumed with Iraq.
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Sanctions and confrontation with the West
1995 – the US impose oil and trade sanctions over Iran's alleged sponsorship of "terrorism", seeking to acquire nuclear arms and hostility to the Middle East process. Iran denies the charges.
1997 – in May, Mohammad Khatami wins the presidential election with 70% of the vote, beating the conservative ruling elite.
1999 – in July, the Pro‐democracy students at Tehran University demonstrate following the closure of the reformist newspaper 'Salam'. Clashes with security forces lead to six days of rioting and the arrest of more than 1,000 students.
2001 – in June, President Khatami is re‐elected.
2002 – in January, US President George Bush describes Iraq, Iran and North Korea as an "axis of evil", warning of the proliferation of long‐range missiles being developed in these countries. The speech causes outrage in Iran and is condemned by reformists and conservatives alike; in September, Russian technicians begin construction of Iran's first nuclear reactor at Bushehr despite strong objections from the US.
2003 – in June, thousands attend student‐led protests in Tehran against clerical establishment.
2005 in August‐September, Tehran says it has resumed uranium conversion at its Isfahan plant and insists the program is for peaceful purposes. IAEA finds Iran in violation of the nuclear Non‐ Proliferation Treaty; in June, Mahmoud Ahmadinejad, Tehran's ultra‐conservative mayor, wins a run‐ off vote in presidential elections, defeating cleric and former President Akbar Hashemi Rafsanjani.
2006 – in February, IAEA votes to report Iran to the UN Security Council over its nuclear activities. Iran resumes uranium enrichment at Natanz; in April, Iran says it has succeeded in enriching uranium at its Natanz facility.
2007 – in October, the US announces sweeping new sanctions against Iran, the toughest since it first imposed sanctions almost 30 years ago.
2009 – in June, Mahmoud Ahmadinejad is declared to have won a resounding victory in the 12 June presidential election. The rival candidates challenge the result, alleging vote‐rigging. Their supporters take to the streets, and at least 30 people are killed and more than 1,000 arrested in the wave of protests that follow; in August, Mahmoud Ahmadinejad is sworn in for a second term as president, the cabinet is the first since the founding of the Islamic Republic in 1979 to include women.
2010 – in June, the UN Security Council imposes fourth round of sanctions against Iran over its nuclear program, including tighter financial curbs and an expanded arms embargo.
2011 – in September, Iran announces that the Bushehr nuclear power station has been connected to the national grid.
2012 – in January, the US imposes sanctions on Iran's central bank, the main clearing‐house for its oil export profits. Iranian threatens to block the transport of oil through the Strait of Hormuz; in July, the European Union boycott of Iranian oil exports comes into effect; in October – EU countries announce further sanctions against Iran over its nuclear program, focusing on banks, trade and crucial gas imports.
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2013 – in June, the reformist‐backed cleric Hassan Rouhani wins the presidential election, gaining just over 50% of the vote; in November; Iran agrees to curb uranium enrichment above 5% and give UN inspectors better access in return for about US$7 bln in sanctions relief at talks with the P5+1 group – consisting of the US, Britain, Russia, China, France and Germany – in Geneva.
2014 – in November, Russia agrees to build up to eight nuclear reactors in Iran, in move aimed at easing Iranian demands to have its own uranium enrichment.
2015 – in July, after years of negotiations, the world powers reach a deal with Iran on limiting Iranian nuclear activity in return for lifting international economic sanctions. The deal reportedly gives UN nuclear inspectors extensive but not automatic access to Iranian sites.
Source: BBC Monitoring
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Appendix 3: Further reading on Iran
Title: Iran's Political Economy since the Revolution Paperback (August 2015)
Author: Suzanne Maloney
This book (the most up to date) provides a very comprehensive overview of Iran's political economy since the 1979 revolution and, in particular, delves into the effect of sanctions and the opportunities for investors in the energy sector. The book also features interviews with American and Iranian government officials. Moving chronologically from the early years under Khomeini, through the economic deprivations of the 1980s during the Iran‐Iraq war, through liberalization under Khatami to the present, the author offers insights into Iran's domestic politics and how economic policies have affected ideology, leadership priorities, and foreign relations.
Title: Revolutionary Iran: A History of the Islamic Republic (2013)
Author: Michael Axworthy
The author is the acknowledged expert on the history of Iran. He has published several books covering the history of the country. He says “many policy‐makers today share a weary wish that Iran would somehow just disappear as a problem. But with Iran's continuing commitment to a nuclear program and its reputation as a trouble‐maker in Afghanistan, Lebanon and elsewhere, this is unlikely any time soon. The slow demise of the 2009 'Green Revolution' shows that Revolutionary Iran's institutions are still formidable”. This book is from 1979. The book below covers the history of the country from its known origins.
Title: Iran: Empire of the Mind: A History from Zoroaster to the Present Day (2008)
Author: Michael Axworthy
This covers a much longer time period in the history of Iran than the author’s book cited above. Beyond the often aggressive headlines about Iran is a really fascinating story of a nation of great intellectual variety and depth, and enormous cultural importance. A nation whose impact has been tremendous, not only on its neighbors in the Middle East, but on the world as a whole – and through ideas and creativity rather than by military actions. The book traces the often complex succession of dynasties that ruled ancient Iran and the surprising ethnic diversity of the modern country, held together by a common culture.
Title: A History of Modern Iran Paperback (2008)
Author: Ervand Abrahamian
This book is much more focused on the modern history of Iran, i.e. through the 20th century. It covers the period when oil was discovered, imperial interventions, the rule of the Pahlavis and, in 1979, revolution and the birth of the Islamic Republic. In the intervening years, the country has experienced a bitter war with Iraq, the transformation of society under the clergy and, more recently, the expansion of the state and the struggle for power between the old elites, the intelligentsia and the commercial middle class.
Title: Iran ‐ Culture Smart! Guide to Customs & Culture – Illustrated (October 2008)
Author: Stuart Williams
The publicity blurb says “don't pack anxiety in your suitcase. By reading Culture Smart Iran before you go, will ease your travel and avoid confusion. The book claims it will help you to understand local manners, customs and laws. It will point out the historical perspectives, taboos, business etiquette, eating and drinking habits.
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Appendix 4: Media in Iran
Iranian Media
Source: BBC Monitoring
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Who are we?
Macro‐Advisory Ltd. is the leading strategy firm focused on the Eurasian region. The firm provides economic, political and industry analysis for strategic and portfolio investors. Macro‐Advisory’s specialty is helping its clients to optimize their business strategies and to make their forecasts more reliable. Macro‐Advisory cuts though the noise to help businesses focus on the underlying trends, the real political risks, and the opportunities across the region.
The firm’s senior partner, Chris Weafer, was voted best Russia/CIS strategist for 2013‐14 in separate surveys carried out by Institutional Investor and Thomson Reuters Extel. He is a frequent contributor to the Financial Times, Wall Street Journal, Bloomberg, CNBC, and other media outlets on issues associated with the region.
Macro‐Advisory’s consulting services range from access to reports covering macro, political and risk trends in the region, to one‐off presentations and projects, and fully bespoke services covering individual company requirements. The firm frequently assists companies in educating their respective boards and shareholders on the real risks and opportunities in the region.
What we do:
Help investors to better understand the current trends in the economies of Russia and the other states of the CIS and broader Eurasia region
Cut though the noise to identify the real risks, whether political, economic or business related
Highlight changes in government strategies to clarify future trends and priorities so as to help investors better identify business and profit opportunities across the region
Undertake specific project work, whether sectoral, thematic or macro focused
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Provide a monitoring service to highlight specific areas of interest for individual clients across all countries in the region
What we deliver:
Create a “roadmap” of political forces, stakeholders, and influencers who could potential impact our clients’ businesses and investments
Provide economic, political, and industry‐specific strategy recommendations based on the prevailing political dynamics in Russia, Ukraine, Kazakhstan, and other markets within the CIS and Eurasian Economic Union
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Assist in differentiating between political noise and legitimate commercial threats to a company’s business interests in the region
Conduct an ongoing monitoring service of the legal and regulatory environment
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Recent research publications*
Russia Macro Monthly: Fruits of calmer diplomacy (October 2015)
An economy badly in need of a fix (September 2015)
Are we there yet? – Mid‐year economic and political review (August 2015)
Exactly what is the New Norm? (July 2015)
#realeconomik (June 2015)
After a positive first quarter, what’s next? (April/May 2015)
Revisiting the scenarios for the economy (March 2015)
In Context: Ruble is stuck between weak oil and a hard Fed (August 2015)
Sanctions: A frozen conflict buffeted by a cold wind (June 2015)
St Petersburg Forum (June 2015)
Oil price outlook: How far may oil fall? (January 2015)
Ukraine 2015: Investment case depends on peace, aid and unity (January 2015)
Market Outlook: Partying like its 1999 or 2009 … but with less to celebrate (April 2015)
What may rally Russian assets in 2015? (January 2015)
Eurasian Union: Initiation report (May 2015)
Country Profile: Kazakhstan: A difficult balancing act (October 2015)
Ukraine: Dangerous conflicts (July 2015)
Georgia: What to do when reality intrudes? (June 2015)
Armenia: Country profile & macro update (May 2015)
Turkmenistan: At a crossroads or, in a cul‐de‐sac? (April 2015)
Kazakhstan: Country profile & macro update (March 2015)
Azerbaijan: Country profile & macro update (February 2015)
Caspian Corridor: Inaugural Caspian Corridor report (October 2015)
Sector overview: Kazakh Agriculture: Lagging but with huge potential (November 2015)
Russian Agriculture: Moving from a neglected to a priority industry (October 2015)
Pharmaceuticals: The long road to localization (July 2015)
Special Focus: Deteriorating labor demographics (January 2015)
Russia and geo‐politics: A different kind of war (December 2014)
Upcoming publications
Country Profile: Mongolia initiation report (TBP in November 2015)
2016 Previews 2016 Russia, Ukraine and Eurasia previews (TBP in November & December 2015)
* Clients may request copies of any published reports via: jpn@macro‐advisory.com
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Contacts
Chris Weafer Sharon George Tel: +7 916 349 2039 Tel: + 44 7812 143 456 Email: cjw@macro‐advisory.com Email: smg@macro‐advisory.com
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