A Devastated Economy and the Exit of Foreign Investors
A Devastated Economy and the Exit of Foreign Investors
The exit of several foreign investors from Iran in recent months has revealed new dimensions of isolation and monopoly in Iran’s turbulent economy, while the dollar rate in the free market has entered the eighty thousand toman range, and Trump’s return to the White House has made oil exports and attracting investment more difficult for the Islamic Republic. A few foreign investment companies are quietly withdrawing their investments from Iran.
Although these companies have not officially announced the reason for their departure, experts in Iranian media warn about the continuation of this trend and the further economic isolation of Iran in these tough 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 the 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, a giant in the Middle Eastern food industry, quietly exited the Iranian edible oil market after two decades of significant presence. Some experts attribute this exit to escalating political tensions and reduced profitability. However, the story does not 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 left the list of Hyperstar shareholders, and the European investment company IIIC, which holds about 33% of Digikala’s 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 verge of losing its last opportunities to attract investment?
Why are foreign investors leaving Iran?
In a statement released on January 2, the Savola Group cited its strategy of timely exit from non-core markets as the reason for halting its activities in Iran. However, speculation about the underlying reasons for the Saudi investor’s exit suggests that political reasons and Iran’s international conditions may have influenced this decision. The simultaneous departure 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 its activities now, when it seems that the relationship between the Islamic Republic and Saudi Arabia has slightly improved, has become questionable.
Some, noting that this company had previously exited the markets of Morocco and Iraq, believe that this decision was solely based on marketing strategies.
On the other hand, some argue that in a situation where this company produces more than forty percent of Iran’s edible oil consumption and holds eighty percent of the shares of the important Behsher Industries company, the decision to leave Iran still does not align with economic criteria.
The decision to exit a market, especially for large companies that conduct market studies, feasibility assessments, and risk analysis before investing, is rarely made overnight or in the short term.
The decision to withdraw investments is usually the result of a combination of economic, political, and managerial factors that gradually make it impossible for them to remain. These decisions are mostly made after a thorough assessment of risks and opportunities. But why Iran?
Decreasing Purchasing Power and a Challenging Business Environment
Iran has faced deep economic problems in recent years.
Rising inflation rates, severe currency fluctuations, budget deficits, and increased government taxation have all combined to reduce consumers’ purchasing power. This reduction has directly impacted companies’ profitability and diminished the attractiveness of investing in the Iranian market.
Iran has consistently ranked among the lowest countries in international indices related to the business environment.
According to the latest business environment rankings by the British group Economist Intelligence Unit, Iran ranked 81 out of 82 countries from 2014 to 2018, with only Venezuela ranking lower. However, in the new rankings, Iran’s name is not even on the list, indicating a worsening business environment in the country.
In the World Bank’s Ease of Doing Business ranking, Iran is placed 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 investment formation rate over the past decade is evidence of this claim that not only foreign investors but also domestic investments are leaving Iran.
A report by the Economic Analysis Department of the Chamber of Commerce shows that the average annual investment growth rate in the 1990s was negative 47 percent, and actual investment decreased from 171 trillion tomans in 2011 to 100 trillion tomans by the end of this decade.
For this reason, within Iran’s economic circles, the 1990s have been labeled 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 also leaving. According to official reports, the trend of capital flight from Iran has intensified since 2015, but it peaked in 2017, coinciding with the United States’ exit from the JCPOA. In that year, Iran’s net capital account was more than nineteen billion dollars negative.
Changing Laws and the Phenomenon of Shadow Governments
Instability in laws and economic policies, especially rent-seeking mechanisms, has made the business environment in Iran more ambiguous. 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 unofficial bodies, such as companies affiliated with security and religious institutions, has also added to the complexity of the economic environment. 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 2003. While the Turkish-Austrian company TAV was supposed to construct all phases of this airport within two years, the Revolutionary Guards blocked the airport runway on the first day of the inauguration, preventing other planes from landing and taking off, and canceled the contract. The subsequent phases of this airport remain incomplete 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 might trap them in Trump’s stringent measures. For these companies, continuing to operate in Iran might involve the risk of losing more lucrative opportunities in Western markets or paying heavy fines.
Are the Opportunities Lost Forever?
Many experts and private sector representatives warn about the intensifying wave of investor exits from Iran. Farshid Farzangan, the head of the Iran-UAE Joint Chamber of Commerce, has called this a sign of foreign investors’ concerns about the country’s economic situation and said the exit of foreign brands is a warning bell for Iran’s economy.
However, 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; what challenge does it pose? What is a mosquito that we should worry about its blood pressure?’
The long-term consequences of foreign investors leaving Iran, in a situation where there is no clear prospect for attracting new investments, have become worrying. In normal conditions, attracting foreign investments could alleviate 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 added risk of war to the systematic risks of Iran’s economy, the last opportunities for attracting foreign investment are being lost.