The greatest threat to Iran’s economic revival may not lie within the country’s borders
I hadn’t been to the Landmark Hotel since 2011. The last time I'd visited the 117-year-old Victorian building I spent the afternoon pouring vintage port to people in the Grand Ballroom, trying to have them believe I was qualified to speak about wines about the same age as me. That was all for work – I was a wine merchant in a former career, and that weekend UK magazine Decanter had invited us to sample our finest products to the world. Still it was fun. And we got to take a few bottles home for our troubles.
On Wednesday I went back to the exact same room for a more sober occasion. It was the Financial Times’ inaugural Iran Summit, an event meant to showcase the vast business and economic opportunities offered by the country in the post-sanction era. It was well attended: introducing the day were speeches by Sajid Javid, UK business secretary, and Mohammad Nahavandian, Iran’s chief of staff. Both had a similar message to relay to delegates. But they did it in very different styles.
Quite typically for an eloquent Brit, Javid started his address with a bit of banter (“I’m very happy to be here – because I don’t have to speak about Brexit for at least 15 minutes”), peppered it with goodwill and pragmatism (“our future cannot depend only on engaging only with easy, familiar partners”) and concluded on a blatant yet adroit sales pitch for UK Inc. (“We have to secure new markets for British goods”). He announced that a UK trade mission would go to Iran in May.
Nimble as his speech was, however, Javid found it hard to battle away the impression that the UK is a bit late to the Persian party. When FT editor Lionel Barber observed that French planes and German machinery were likely to arrive in Tehran before the UK delegation, the minister’s defence was to observe that “it’s never too late”.
Late perhaps better qualified the arrival of Nahavandian, who entered the room as Javid was answering his last few questions. Yet he remained calm as he jumped on stage, delivering his address in a soft voice (sometimes hardly audible) and tranquil pace (verging on slow). His speech, notably devoid of ice-breaking jokes (in fact deadly serious), made him a less effective salesman than his well-trained UK counterpart, I first thought.
In the event I was wrong. Judging by the silence across the room, his audience soon got captured by his meticulously structured speech. It may not have been for the chief of staff's oratory skills. Many attendees, rather, were looking hard for reasons to believe that Iran was finally getting serious about attracting foreign capital to the country.
Nahavandian certainly made the case for it. Iran’s economy would grow 4 to 5 percent annually in the years to 2020, he said, with the government aiming for 8 percent thereafter. Tehran was now pursuing a “constructive interaction approach”, he added, according to which there would be “no limitation” to economic engagement with Europe as long as mutual interest is served. He also announced efforts to cut red tape and improve transparency. But potential and policies weren’t all: risks had also been reduced on the ground. Macroeconomic and political conditions were now much less volatile.
Other speakers later added to the bull case. They described Iran as a market of 80 million people with incredible potential – “the only G20 country not to be in the G20”. It had the largest combined oil and gas reserves in the world, yet these only represented 23 percent of the economy (compared to 40 percent in Russia). And most importantly, it was endowed with an exceptional human capital wealth: every year as many engineers graduate in Iran as in the US, one person noted.
Yet they were all clear about one thing: Iran’s economic revolution still faces hurdles. The state continues to concentrate power on all industrial and business matters: public entities and affiliates retain control much of Iran’s economy; strong vested interests will probably resist foreigners’ entry. Neither are financial institutions independent, with national lenders in public hands and the central bank under government influence. Beyond the sanctions' impact, misallocation of capital, lack of competition and inward-lookingness explain why Iran’s productivity has receded over the past decade.
Yet the biggest economic roadblock may lie elsewhere. The US still forbids its companies from providing Iranian entities with loans, insurance or even cash-processing services. In the EU such restrictions have been lifted, and the US has said it will no longer punish foreign lenders that violate its rules. But European banks remain fearful of doing business with Iran: their compliance departments are loath to authorise something that’s not allowed across the Atlantic (they remember when France’s BNP was fined $9 billion in 2015 for violating sanctions). Some credit export agencies – whose help is often crucial to facilitate trade – are also being held back, industry observers told me.
Iran is not a poor country. But after years of state interference and isolation, its financial intermediation system is broken - it needs external liquidity to pay for the goods and services it purchases. Even more basically, it needs to be able to process payments in dollars. Yet as long as sanctions remain in the US, unlocking foreign money will prove a problem. Worse, restrictions and punishments could actually return: under what is called ‘snapback clauses’, the West can re-impose sanctions if it has reasonable grounds to think Iran hasn’t dropped its nuclear ambitions. The US elections are making foreign banks even warrier – what happens to lenders who have engaged with Iran if a trigger-happy candidate suddenly decides to cut off ties with Tehran?
The US’ rapprochement with Iran is one of Obama’s most impressive feats. But the timing of it is less ideal: foreign investors who find it too hard to enter the market now probably won't bother trying again before a few years. Should that become a trend, the FT could have more difficulties filling the Landmark’s Grand Ballroom again in 2017.