Iran | President Rouhani struggling to achieve FDI targets

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Iran | President Rouhani struggling to achieve FDI targets

Iran seems unlikely to meet foreign investment targets, despite a substantial increase in inward investment since the implementation of the nuclear agreement in 2015.

Official Iranian data cited in the national press indicates that there was an 84% increase in FDI in the 2016 financial year. But at $13 billion in the period March 2016 to March 2017, these investment flows are far off the targets set by President Rouhani’s government. A plan to reach an annual GDP growth rate of 8% specified – among other targets – that Iran should attract $50 billion annually in the period 2017-22. Amid uncertainty around the nuclear deal and US sanctions, this target appears unachievable, at least for the next few years.

The same official data suggests that in the period 2013-2017, Germany, China, Turkey, Austria, the UAE and France accounted for the most FDI into Iran. This is partly a reflection of Iran’s historic diplomatic and commercial relations, and also the ability of companies from these countries to access financing in Iran. Since August Iran has reached agreements with banks and other financial institutions in South Korea, China, Denmark and Austria. Financing was a major obstacle for would-be investors immediately after the 2015 deal, even though the country was readmitted to the SWIFT network.

In addition to financing, international sanctions remain a barrier to trade. In October, the US Treasury extended its terrorism-related sanctions on Iran, to include the IRGC. It also named additional businesses that it believes support their organisations or the Iranian military more widely. Prior to that IRGC-Quds Brigade, a branch of the organisation, was sanctioned. These measures only apply to US companies or individuals but still seems to be putting off many non-US companies from investing, at least based on anecdotal information. This caution is not unique to Iran, but in this case seems to reflect the extent to which sanctioned entities are integral to the Iranian economy.

The IRGC and its affiliated organisations have long operated in a wide range of sectors. Under the presidency of Mahmoud Ahmadinejad this involvement seemed to expand and now includes telecommunications, construction, security, banking, insurance and even hospitality. President Rouhani set out to limit this IRGC involvement in the economy as part of his plans to balance the Iranian economy and open it up to foreign investment. In 2016, his government refused to award ten large contracts to Khatam Al-Anbiya (the IRGC’s economic arm) and cancelled the sale of 50% of Iran’s telecommunications corporation to IRGC-affiliated companies.

However, a senior specialist in the Gulf economies told us that while Rouhani may have succeeded in making some progress against the IRGC, ‘the pace of success is too slow and small to celebrate’. Rouhani, like his predecessors, does not seem to have the political or institutional power to roll back or limit IRGC-linked entities from operating in the private sector. In June, the Supreme Leader publically reprimanded the president in response to veiled criticism he had made of the IRGC. The US administration appears intent on adding IRGC-linked entities to the sanctions lists. So we anticipate that companies with US links, or operations in particular, will continue to find Iran a challenging business environment to navigate.

Author: Risk Advisory's Security Intelligence & Analysis Service
Published: 5th December 2017