Frontier Markets

Could Iran Be on Investors’ Radar?


Iranian tourists get away from the outdoor heat in a restaurant in one of the numerous malls on the island of Kish

Photograph by Atta Kenare/AFP via Getty Images

Iranian tourists get away from the outdoor heat in a restaurant in one of the numerous malls on the island of Kish

Pre-“Death to America!” and Not Without My Daughter, before Iran became that rogue state operating under constant international sanctions, Tehran and Washington were famous friends. In toasting the shah, President Jimmy Carter called the former Persia an “island of stability in one of the more troubled areas of the world.” As recently as 1978, Harvard Business School ran a campus out of Iran’s capital, a Tom Friedman-worthy experiment that now survives on Facebook (FB). Israel, for long an ally of the shah, plied his kingdom with military and medical technology and dispatched troops to aid in earthquake relief. This writer’s mother donned miniskirts in Iran’s once-thriving disco scene. (Could you imagine? I try not to.)

That all ended with the hostage crisis and the ascent of the ayatollahs, which drew more than three decades of economic isolation.

Now, with eased sanctions being dangled in high-level nuclear negotiations with Tehran, you can sense a glimmer of a wisp of excitement for a Persian investing renaissance. In spite of spiraling inflation and uncertain government oil revenue, Tehran’s stock exchange is near an all-time high. Iranians needing to spend their weakening rials hoard Johnnie Walker Red and Tommy Hilfiger on the luxury mall‑infested island of Kish. You can rather easily score an iPad or iPhone in the capital for $800 to $1,200. It turns out that even the supreme leader is in touch with his inner Warren Buffett.

Use your illusion for a moment and consider global over-liquidity and the resulting appetite for new risks. It’s not too much of a leap to call Iran a bleeding-edge developing market destination for dollars, euros, and pounds, not unlike Myanmar was five years ago, Colombia was at the turn of the century, and Vietnam was during the twilight of the Cold War.

“Iran is something I am always watching closely,” says Jim O’Neill, the former chairman of Goldman Sachs (GS) Asset Management who famously coined the term BRICs and included Iran among his list of promising Next-11 (PDF) frontier markets. He cites Iran’s attractive demographics (the country is overwhelmingly young and hungry for Western goods) and a reasonably high Growth Environment Score (PDF), a composite metric for economic potential he derived while at Goldman. “Change the mentality at the top,” he says, “and Iran could be of relevance.”

It already is to multinational executives. Just ask former Vice President Dick Cheney, who as the late-1990s chief executive officer of Halliburton (HAL) joined with Conoco (COP) and Texaco (CVX) to advocate a trade rapprochement with Iran, the OPEC stalwart. (I recall retrieving a get-with-it-Bill fax from Cheney for the president when I was an intern in the Clinton White House.) Halliburton surreptitiously stuck around Tehran as late as 2005. Naturally, the Chinese have already taken over the smoggy megalopolis.

But it’s been the Obama administration’s tighter, more targeted and multilateral sanctions regime that has walloped the $450 billion economy. In particular, the 2012 National Defense Authorization Act has stifled Iran’s crude oil exports by targeting Iran’s central bank. Foreign financial institutions that were used to transacting with Tehran suddenly had to weigh that theater of business against their American interests, especially after Obama signed an executive order freezing all Iranian government assets held or traded in the States and sanctioning foreign financial institutions that conduct transactions through Iran’s central bank for oil imports. The Iran Threat Reduction and Syria Human Rights Accountability Act of 2012 further tightened those screws by cutting off access to the U.S. market for companies that do business with Iran’s energy sector, freezing the American assets of those who in any way aided the repatriation of Iranian oil revenue, as well as insurers and lenders to the National Iranian Oil Co. and the National Iranian Tanker Co.

Iran has been crying uncle for the better part of two years, and in June overwhelmingly elected a president who vowed to pursue economic normalization with the West. As the nation of 76 million lives and dies by its petroleum exports, it’s increasingly desperate for investment in its rusting exploration and production infrastructure—so much so that it recently had no choice but to burn off $7.3 billion worth of natural gas, or enough to supply a quarter of what South Korea demands yearly. Amazingly, despite being the world’s third-largest gas producer, Iran is now a net importer of the fuel.

Quite relatedly: Iran’s rampant stagflation is an existential threat to its ruling clerics, who violently cracked down on popular protests in 2009. Paying street toughs and other pious loyalists is ever harder with less oil money to spread around.

Meanwhile—so close and yet so far away—Iranian ingenuity helped found EBay (EBAY) and Hot Pockets. Andre Agassi’s 1990-vintage mane was at least half-Persian. President Reagan, to little apparent avail, once had a kosher birthday cake and a Bible hand-delivered to Tehran’s mullahs.

So about that Iran ETF on the New York Stock Exchange: Far more surreal things have happened.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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