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Choosing the path to Tehran

by George Hoguet

Choosing the path to Tehran

‘Iran,’ argues Henry Kissinger in his coruscatingly brilliant book, World Order, ‘must decide whether it is a country or a cause.’ Many factors – particularly the US –will ‘determine whether it pursues the path of revolutionary Islam or of a great nation legitimately lodged in the Westphalian system of states.’

A visit to the palace of Persepolis, built in 500 BC, leads to a better understanding of the Iranian self-image. At one point, the Iranian empire extended from modern-day Libya to Kyrgyzstan and India. Unlike Iraq, Syria, Lebanon and Jordan – the current borders of which were determined by colonial powers in the 20th century – Iran, in journalist Stephen Kinzer’s phrase, ‘has existed, more or less within the same boundaries, with more or less the same language, for 2,500 years’.

An economic snapshot of Iran

Should sanctions end, global portfolio investors may be able to invest in the Tehran stock market. But a lot has to fall into place, both from a geopolitical and an institutional perspective. A country with nearly 80m inhabitants (roughly the population of Germany) and the world’s fourth-largest oil reserves presents many opportunities, as did Russia after the collapse of the Soviet Union. Its natural gas reserves are second only to Russia’s. Iran is currently inaccessible to global investors; over time, it could be included in ‘frontier market’ indices.

The International Monetary Fund and the World Bank estimate the size of the economy in 2014 at $400bn in nominal exchange rate terms, making it larger than that of Thailand, South Africa or Singapore. Exports account for 23% of GDP. Iran produces 3.7m barrels of oil per day, and exports 1.2m bpd. Iran hopes to increase oil exports to 2.3m bpd if sanctions are lifted. Over the past three years, Iran has run a current account surplus in excess of 5% of GDP. Foreign exchange reserves stood at $110bn at the end of 2014. Iran is a net creditor in the international system.

Yet Iran experiences many of the generic problems common to other emerging markets – such as corruption, rent-seeking and public health challenges. Sanctions have significantly impeded economic development. Output contracted in both 2012 and 2013 by 0.6%. The state plays a major role in the economy, with substantial inefficiencies and incomplete projects.

Out-of-date infrastructure is not helped by international isolation. The non-oil sector is growing well below potential. Currently, the economy is experiencing high unemployment (11%) and inflation (15%). In the past two years, the rial has fallen sharply, contributing to inflationary pressures.

One route for foreign investors is through the Tehran stock exchange. Launched in 1967, it now has 440 companies listed. The Iranian state — directly or indirectly — holds large positions in many companies. The Iranian Revolutionary Guard, which is responsible for protecting the Islamic system, controls several important companies in key economic sectors.

The current stock market capitalisation is estimated at $97bn. Because of government and other holdings, the actual available capitalisation is only around $30bn; as in other markets, there are limits on foreign ownership. The largest sectors of the Iranian stock market are chemicals (23%), financials (13%) and metals (10%.) The average daily trading volume is $36bn. The largest company, Khalij Fars Petrochemical Company, is valued at $9bn as of May 2015; the second largest − the Mobile Telecommunication Company of Iran − at $3.6bn.


Iran’s gradual integration into the world economy would be a profound event. There is ample precedent for foreign capital rushing in and markets rallying when countries liberalise stock markets, only for capital to leave – and markets crash – when policy mistakes compound. Recall that Russia defaulted on its domestic debt and the Czech Republic experienced a massive banking crisis in the 1990s. And there are many other examples of emerging market crises, such as the Mexican ‘Tequila’ crisis and the Asia crisis.

But Iran has potential to be one of the world’s largest oil exporters – and there is demand for investment projects and consumer goods. If sanctions are repealed, investors will have to decide whether current prices correctly reflect economic, financial and political risks.

In the initial phases of Iran’s integration, a prudent way to invest in Iran may be to invest in multinational corporations – including those in Turkey and other neighbouring countries, which will be active in Iran and will have well-diversified global operations. 

■ George Hoguet is Global investment Strategist in the Investment Solutions Group at State Street Global Advisors.