G3 Insight: Iran - Presidential Election Unlikely to Affect Stability

by Clive Newell

G3 Insight: Iran - Presidential Election Unlikely to Affect Stability

For all its constant internal and external tensions, Iran has maintained a remarkable degree of political stability since the 1979 revolution. Despite a number of disaffected minorities and protest groups, there is no insurgency and little or no sign of public unrest. The presidential election in May is not expected to be accompanied by serious protests or violence, and the outlook is for continuity in all the major areas of government policy. The regime is focusing on priority areas for FDI that present opportunities to investors despite tense relations with Arab neighbours and the West and the considerable difficulties of doing business.

Domestic politics

Iran goes to the polls to elect its president on 19 May. The incumbent, Hassan Rouhani, is seen as an effective manager and is expected to win (no Iranian president has failed to win a second term since the post was created in 1981) despite the economic hardship faced by much of the population and the perception amongst his opponents that he has been too accommodating towards the US. Even if he is unsuccessful Iran’s political stability is unlikely to be threatened.

The Joint Comprehensive Plan of Action (JCPOA) nuclear deal agreed with the five permanent members of the UN Security Council and the EU in January 2016 has led to the partial lifting of sanctions and to some economic growth. However, most Iranians have yet to see much practical benefit, as Supreme Leader Ayatollah Ali Khamenei pointed out in a speech in February. Khamenei’s criticisms are probably intended to warn the pragmatic Rouhani and other reformists not to get too close to the West, rather than to damage his electoral prospects, but they will have given encouragement to the hard-line conservatives who see Rouhani as soft on America and the JPOA as a bad deal for Iran.

The reformist factions have formed a more or less stable political bloc in recent years, and seem to be united behind Rouhani. Political conservatives – the so-called Principlists – are currently divided into a large number of small factions. None of the candidates who have come forward, Principlist or reformist, is expected to unseat Rouhani, although it is not out of the question. This includes Mahmoud Ahmadinejad, his hard-line predecessor, and Ebrahim Raisi, another hardliner. Registration of candidates has closed and the Guardian Council, which vets them, is due to announce the list of approved candidates by 27 April.

The economy

Iran's long-struggling economy has improved in recent months, partly because of the lifting of most nuclear-related sanctions under the JCPOA. Finance minister Ali Tayebnia is credited with a number of successes, including the reduction of previously burgeoning inflation to single figures and the restoration of positive economic growth – nearly 7% over the last 12 2

months. Oil exports have doubled since January 2016, and Iran has also seen a non-oil trade surplus for the first time since 1979, despite what a recent International Monetary Fund (IMF) report calls banking system weaknesses and structural bottlenecks.

Considerations for investors

The business environment is challenging. The reluctance of many international banks to handle transactions with Iran for fear of falling foul of remaining US sanctions remains a major obstacle for Western businesses. Iran’s banks still lack liquidity and remain far short of compliance with international standards. The government is planning measures to strengthen the power of the Central Bank of Iran to regulate and control the financial sector, but this is controversial; many major Iranian financial institutions fear that they will suffer from transparency requirements and encroachment on their interests if a more empowered Central Bank enforces international banking practices.

Other challenges for investors include the preponderance of large and powerful state-controlled or parastatal organisations, including the still-sanctioned Revolutionary Guards, in many sectors of the economy; the opacity of the business environment; and corruption risk, which worsened during the years of international sanctions. If President Trump takes the hard line against Iran that he threatened in his election campaign – and his administration has already imposed new sanctions in response to a missile test in February – the modest improvement in US-Iran relations in the Obama presidency will be reversed. This would give satisfaction both to Iranian conservatives and to the US’s allies in the Gulf.

However a number of government-to-government projects and large-scale deals with foreign companies are under way. Airbus and Boeing are on track to sell new civil aircraft, and a variety of European and Asian firms are investing in mining, vehicle manufacture, transport infrastructure, retail and tourism. The government has named twelve sectors where it wants to channel FDI (but is still in the early stages of putting this into practice). These include oil and gas, mining and electronics.

Oil ministry officials say the government is seeking $185bn of investment in at least 50 oil and gas projects. The sector has great potential for foreign expertise, with infrastructure in a poor state after years of sanctions-induced neglect. Investments are being negotiated with European and Asian oil and oil services companies. Unpopular buy-back arrangements are being replaced by the new Iran Petroleum Contract, under which international oil companies (IOCs) will be joint venture partners, fully involved in exploration, development and production operations. They will be required to commit to optimal and sustainable production and to transfer of technology.

Doing business in Iran has never been easy, before or since the revolution, but there is enormous pent-up demand for Western goods, services and expertise. Patience, investment in personal relationships, and time spent on the ground can lead to success despite the obstacles. As ever, it is essential to conduct due diligence on counter-parties, to avoid sanctioned entities and reduce the potential for disputes.

 

Clive Newell
Clive draws on his extensive overseas experience in leading many of G3's assignments in the Middle East, South Asia and Africa

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