In the wake of Barack Obama's phone call to Iranian President Hassan Rouhani in September 2013, a U.S.-Iran détente may be possible. Even with a new warmth between the two countries, a number of questions have been raised, the most obvious being "what now?" With the states slowly inching toward a more cordial relationship, now is the perfect time for American firms to explore investment options as the Iranian economy could potentially be a vibrant place for your money in the near future.
With the release of over $4 billion in previously frozen assets, the Iranian economy may see an opportunity that has not been present for over three decades: an economy less burdened by sanctions. Since 1979, when the United States first applied sanctions, the Iranian economy has struggled as money, goods, and skilled labor hemorrhaged from the country.
While many have long seen the sanctions as ineffective, recent comments by Rouhani's administration indicate an incredibly dire financial situation. The continued isolation from the SWIFT banking system causes capital to flow around the country, and rarely through. Nearly one in five Iranians live on $10 per day or less, a number that has grown steadily in recent months as domestic firms continue to declare bankruptcy and create more unemployment.
Iran's oil trouble
Especially the oil market has suffered. Under sanctions, Iranian oil exports have fallen to record lows and have allowed neighboring Iraq to take on a larger role in the market, something that has not happened since the 1980s. Three-quarters of Iran's diminishing foreign reserves, valued in mid-2013 at $60 million, lie in escrow accounts that permit goods purchases only from Iranian oil consumers.
As such, the Iranian economy has been left with little choice but to import high-bulk, low-quality goods from countries such as China. This relationship has left many Iranians with a bad taste in their mouths, feeling cheated by the increasing amount of capital that moves to China and stays there.
A U.S. opportunity
This amalgamation provides the perfect time for American firms to get involved in an ailing economy. Although current sanctions limit the amount of investment in-country (see Executive Order 13622), there are indications that Obama may make minor unilateral concessions, which would resonate in both markets.
Any minor repeal of sanctions such as EO-13622 could open new capital flows into Iran. Beyond the immediate creation of American business ties with the country, funds invested now could create potential markets for more American products and services in the long run.
The shortage in skilled labor in the country allows for a more indirect approach. While China has shown a clear preference for Chinese corporations on domestic Iranian projects (and therefore keeping money in the Chinese system), a more cooperative approach may allow for an integrated market, based on skills transfer between American and Iranian firms. The Obama-endorsed sale of General Electric (NYSE:GE) products to Iran could be turned into such a partnership.
This is not to say that the road to an improved Iranian economy will be easy.
There are indications that Supreme Leader Ayatollah Khamenei is not yet completely supportive of improved ties with the United States. The further challenge of a deadlocked Congress means that the possibility of a détente is not set in stone.
What is important is the next step taken by President Obama. Even the smallest American gesture toward reviving the Iranian market will pay great dividends in the long run for firms of both countries.