A Devastated Economy and the Exit of Foreign Investors
A Devastated Economy and the Exit of Foreign Investors
The recent exit of several foreign investors from Iran has revealed new dimensions of isolation and monopoly in Iran’s turbulent economy. While the dollar rate in the free market has reached the eighty thousand toman channel and Trump’s return to the White House has made oil exports and attracting investment more difficult for the Islamic Republic, the few foreign investment companies are quietly withdrawing their assets from Iran.
Although these companies have not officially announced the reason for their exit, experts in Iranian media warn about the continuation of this trend and further economic isolation of Iran under these difficult conditions. It was previously said that the Turkish investor of the V-One chain stores had been removed from the list of shareholders of this store, but what triggered warnings in this regard was the news of a significant number of other investors being added to the list of those exiting Iran’s economy.
In mid-January, it was announced that the Savola Group from Saudi Arabia, the Middle East’s food industry giant, had quietly exited the Iranian edible oil market after two decades of significant presence. Some experts attribute this exit to intensified political tensions and reduced profitability. However, the story doesn’t end here. Hyperstar and Digikala, two prominent brands in Iran’s retail and e-commerce market, have also recently faced the exit of their foreign shareholders. The Emirati company Majid Al Futtaim has been removed from the list of Hyperstar shareholders, and the European investment company IIIC, which owns about 33% of Digikala shares, will leave Iran in the near future.
These exits not only paint a bleak picture of Iran’s business environment but also raise serious questions about the future of the economy. Is Iran on the brink of losing its last opportunities to attract investment?
Why Are Foreign Investors Leaving Iran?
In a statement released on January 2, the Savola Group announced that the reason for halting its activities in Iran was the group’s strategy regarding timely exit from non-core markets. Despite this, speculations about the underlying reasons for the Saudi investor’s exit indicate the possibility that political reasons and Iran’s international conditions influenced this decision. The simultaneous exit of several investors from Iran has also contributed to these speculations.
Despite the fact that the Saudi Savola Group did not leave the Iranian market even during the period of reduced diplomatic relations between Iran and Saudi Arabia in the 1990s, the halt of this company’s activities at a time when the relationship between the Islamic Republic and Saudi Arabia seems to have slightly improved has become questionable.
Some, pointing out that this company had previously exited the Moroccan and Iraqi markets before Iran, believe that this decision was made solely due to marketing strategies.
On the other hand, some argue that in a situation where this company produces more than forty percent of the edible oil consumed in Iran and holds eighty percent of the shares of the important Behsar Industries company, the decision to exit Iran still does not align with economic criteria.
The decision to exit a market, especially for large companies that conduct market feasibility studies and risk assessments before investing, is rarely made in the short term and overnight.
The move to exit by investors is usually the result of a combination of economic, political, and managerial factors that gradually make it impossible for them to continue their presence. These decisions are mostly made with a thorough assessment of risks and opportunities. But why Iran?
Decreased Purchasing Power and Business Environment Challenges
In recent years, Iran has faced deep economic problems.
Rising inflation rates, severe currency fluctuations, budget deficits, and increased government taxation have all contributed to reducing consumers’ purchasing power. This reduction has directly impacted companies’ profitability and diminished the attractiveness of investing in the Iranian market.
Iran has also consistently ranked among the lowest countries in international indices related to the business environment.
According to the latest business environment ranking by the British group Economist Intelligence Unit, Iran ranked 81st among 82 countries from 2014 to 2018, only better than Venezuela. However, in the new ranking, Iran’s name does not even appear on the list of countries, indicating a worsening business environment in the country.
In the World Bank’s Ease of Doing Business ranking, Iran is ranked 127th out of 190 countries. This situation not only discourages foreign investors but also poses serious challenges for domestic entrepreneurs.
The continuous decline in the capital formation rate over the past decade is evidence that not only foreign investors but also domestic capital is leaving Iran.
A report from the Economic Studies Department of the Chamber of Commerce shows that the average annual investment growth rate in the 1990s was minus 47 percent, and the real investment amount decreased from 171 trillion tomans in 2011 to 100 trillion tomans by the end of this decade.
For this reason, economic circles within Iran have referred to the 1990s as the ‘lost decade.’
The capital account index is one of the key indicators in expressing whether a country is a capital importer or exporter. An examination of this index shows that not only is no new capital entering Iran, but capital is leaving. According to official reports, the trend of capital outflow from Iran became markedly intensified from 2015, but it reached its peak in 2017, coinciding with the United States’ exit from the JCPOA. In that year, Iran’s net capital account was over nineteen billion dollars negative.
Changing Laws and the Phenomenon of Shadow Governments
Instability in laws and economic policies, especially rent-seeking mechanisms, have made the business environment in Iran more ambiguous than ever. Foreign companies that operate based on transparency and fair competition struggle to survive in Iran’s economy, where many economic opportunities are dominated by rent-seeking and security institutions.
In such conditions, leaving the field is the most likely fate for these companies. The involvement of informal entities, such as companies affiliated with security and religious institutions, has also increased the complexity of the economic landscape. These interventions, sometimes in the form of sudden changes in laws or creating monopolies, have eliminated the possibility of transparent and competitive economic activity.
One of the most famous examples of the intervention of shadow governments and security institutions in the process of foreign investment in Iran is the story of the opening of Imam Khomeini Airport in 2004. While the Turkish-Austrian company TAV was supposed to complete all phases of this airport within two years, the Islamic Revolutionary Guard Corps blocked the airport runway on the first day of the opening, preventing other planes from landing and taking off, and canceled the contract. The subsequent phases of this airport have not been completed even after two decades.
The Return of Trump and International Pressures
Some speculations in Iran attribute the exit of foreign investors to the return of Donald Trump to the presidency of the United States. Trump’s return has increased the likelihood of heightened international pressures and sanctions against Iran. Since many multinational companies that have invested in Iran also have extensive operations in Western markets, continuing cooperation with Iran may trap them in Trump’s stringent measures. For these companies, remaining in Iran might come with the risk of losing more lucrative opportunities in Western markets or paying hefty fines.
Are Opportunities Lost Forever?
Many experts and representatives of the private sector warn about the intensification of the wave of investors leaving Iran. Farshid Farzangan, the president of the Iran-UAE Joint Chamber of Commerce, has considered this issue as a sign of foreign investors’ concern about the country’s economic situation and has stated that the exit of foreign brands is an alarm bell for Iran’s economy.
Despite this, some government officials try to downplay this phenomenon. Recently, Rouhollah Abbaspour, a member of the Industries and Mines Commission, reacted to the exit of foreign investors by saying, ‘Let them go, for example, what challenge arises? What is a mosquito that its blood pressure matters?’
The long-term consequences of foreign investors leaving Iran, especially when there is no clear prospect for attracting new investments, have become worrying. Under normal conditions, attracting foreign investments could have alleviated some of Iran’s major economic challenges, such as the energy crisis, budget deficits, and inflation. However, with the continuation of political challenges and the addition of the threat of war to the systematic risks of Iran’s economy, the last opportunities for attracting foreign investment are slipping away.