I had not been in Tehran for the past 38 years, but had been a frequent visitor of the country when I was in charge of the Middle East for my bank, Societe Generale de Banque, in Belgium. As the lifting of the Western sanctions against Iran was approaching, I undertook the journey back to Tehran this weekend. I wanted to evaluate what could be done in the field of finance to facilitate the reintegration of Iran in the global world of finance. I had published a post here, in September 2015, advocating the reintegration of Iran in the world community.
The experience of the day-to-day restrictions was enlightening. Cash is the only way to pay for foreigners visiting Iran. And it is not possible to get it from a teller machine with a foreign debit card.: the sanctions have cut any contact between Iranian banking and the outside world even for the simplest transactions. Only domestic cards allow to withdraw cash: 1,000,000 Iran Rials are equivalent to 35 dollars. This applies to the payment of a hotel bill or a restaurant. I almost could not pay my hotel, who, by the way, was holding my passport and my only way to leave the country. I was trapped by the sanctions in the country and barely managed to pay my dues. Only cash in foreign currency allows the visitor to exchange against the local currency.
When I announced I would be going to Tehran, the reactions around me were contrasting: my European friends were envious of a trip to a beautiful and interesting country. For the Americans, I was going to a war zone. I never was concerned about security and the warm assistance provided by local people made my trip memorable on this historic weekend. The soul and spirit of the country has not changed and I enjoyed every minute of my three days in Tehran.
The challenge: rebuild the economic tissueUnder such circumstances, it is not surprising that very intelligent local people might be skeptical about the future of the country: they had learned to survive on their own resources. But it was a hopeful trip. The expectations, particularly in the young graduates and executives, is phenomenal. We cannot disappoint them.
I am not particularly concerned by the need to repair the damage inflicted to the oil industry. The cost is estimated to $ 150 billion over the next five years: it is a huge amount for the country, but I still remember when Exxon Mobil reached the profit milestone of $ 100 billion in one single quarter. It was not surprising to hear that the heads of the oil majors were also spending the week end in Tehran to discuss with the National Iranian Oil Company and the authorities.
It is, however, challenging to do it with a barrel of oil around twenty five dollars. It will require a common policy of Iran and Saudi Arabia, the religious enemies, to stabilize the future of oil prices. Rumors had it that Egypt would probably be the best placed country to intermediate the talks. A barrel around forty dollars seems to be the objective. It would produce $ 100 million a day to the country. We are not talking about a poor country. Just a country devastated by the sanctions.
Infrastructural problems are gigantic: from airlines to hotels, it will take years to make Tehran capable to reach the level of its Gulf neighbors to welcome conferences and world forums. The car industry needs to be rebuilt while streets of Tehran are still over used by a gigantic traffic jam. Real estate will need roads and transportation to develop. A new town is being built in Northern Tehran.
Making finance a development agent
Those ambitious projects will require the rebuilding of the financial infrastructure. Iranian banks are loaded with Non-Performing Loans and fundamentally on a lifeline with the Government and the Central Bank. A massive cleaning between the good and the bad bank will need to be planned to recreate lending capabilities of the banks. In a country of 25 percent interest rates, it is more than a challenge.
Bond financing is limited to Islamic finance. For foreign investors to invest in bonds, the country's leadership will need to add "classic" bonds to the "sukuk" bonds. Developing the bond market and making attractive to foreign investors will be challenge. With a B+ rating, Iran can only issue "junk bonds". This is therefore true for their banks and companies. Trading on the exchanges is largely in bonds.
Where will the engine of growth come from? Equity is the key engine of growth. In a country where there are practically no IPOs and the market capitalization of the Iranian listed companies dropped from $ 400 to $ 100 billion in a few years, it will be a challenge to convince investors. Furthermore, financial education is very limited. The question is "where to start?" I met three of the nine investment banks. All of them were created after 2008. They all need one form or another of financial training in corporate valuation and the Mergers and Acquisition market is at ground zero. They know it and their executives are all prepared to learn and develop new ideas to help their companies.
Rebuilding Iranian capital markets
To assess the current situation, I met the vice Governor of the Central Bank of Iran (Bank Markazi), the executive teams and boards of the Securities & Exchange Organization who regulates financial markets, the Tehran Stock Exchange and the Central Securities Depository of Iran.
If things are done properly, the next five years will allow those institutions to rebuild a market that will be based on investors' confidence, first from within the country, and gradually from abroad. The challenges are numerous: governance, transparency, regulation and liquidity.
But first of all, the building of a state-of-the art IT infrastructure will be needed. It is true for payments. The European model of debit and credit cards is better suited than the US usurary system (I just got an offer for credit cards in the US with a 23.90 percent interest rate!). Iranian banks do not have an international payment experience. It is a challenging brand new world.
Trading securities will require a complete overhaul of the markets IT infrastructure. Fortunately, neighbors such as India have built software and systems that will be hugely helpful. They are better equipped to understand challenges than their Western counterparts, since they built it for their own country.
The human and political challenges
With 60 percent of the population below 40, Iran is a young country. I recognized their drive and commitment. Training them will be an important undertaking, but they are eager to learn. The level of the universities is very high and the quality of Iranian executives is impressive. They are incredibly smart and willing to roll up their sleeves to rebuild their country.
They will discover that sanctions are not the only reason for their economic regression. Something will need to happen to recreate a workforce that works hard. Unemployment is rampant, and there are tens of million uneducated people who have learned to cope and compensate for the sanctions through tricks and day to day survival. Turning it into a useful workforce is a challenge.
In this context the responsibility of the Ayatollah Ali Khamenei's Supreme Leadership of the country to create a passive population of worshippers is unquestionable. He has a huge responsibility in the demise of his country by allowing President Mahmoud Ahmadinejad to destroy his country and launch it into a nuclear challenge that they have now starter dismantling. Dr. Hassan Rouhani is a remarkable President who is bailing out Iran and his decisions are wise and visionary. The recent reaction to the US boats derive was nothing short of unusual and remarkable. Soon or later a new regime will emerge. The Iranians will have to decide how and when they want a new political system. Let us not meddle. The mullahs are a group of remarkable leaders and should not be excluded from the solution.
Are we willing to assist the country in its rebuilding without preconceived ideas? Not to try to turn Iran into a Western country like the Gulf countries, but accompany the New Iran? It will require vision and commitment both in Iran and abroad. The challenge cannot be underestimated and it will not be a quick fix. It is however one of the most exciting transformational opportunities. Let's start now.