Sanctioned and Rent-Seeking Economy; Why Did Foreign Investors Leave Iran?

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 tomans channel 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 capital from Iran. Although these companies have not officially announced the reasons for their exit, experts in Iranian media warn about the continuation of this trend and the further economic isolation of Iran in these tough conditions. Previously, it was reported that a Turkish investor in the "V1" chain stores had exited the list of shareholders of this store, but what raised alarms was the news of a significant number of other investors joining the list of exits from Iran's economy. In mid-January, it was announced that the Saudi group "Savola," a giant in the Middle Eastern food industry, quietly exited the Iranian cooking oil market after two decades of significant presence; some experts attribute this exit to the intensification of "political tensions" and "decreased 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 exited 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 for attracting investment? How did Iran become a benchwarmer in the competition for transit routes? Why are foreign investors leaving? In a statement published on January 1, Savola announced that the reason for halting its activities in Iran was "the group's strategy regarding timely exits from non-core markets"; however, speculations about the underlying reasons for this Saudi investor's exit suggest that political reasons and Iran's international conditions may have influenced this decision. The simultaneous exit of several investors from Iran has also contributed to the formation of these speculations. Although the Saudi group Savola did not leave the Iranian market even during the period of reduced diplomatic relations between Iran and Saudi Arabia in the 1990s, the cessation of this company's activities now, when it seems that the Islamic Republic's relationship with Saudi Arabia has somewhat improved, raises questions. Some point out that this company had exited the markets of Morocco and Iraq before Iran, believing that this decision was solely due to marketing strategies. Conversely, some argue that given that this company produces more than forty percent of the cooking oil consumed in Iran and holds eighty percent of the shares of the important "Behshahr 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 studies, feasibility assessments, and risk evaluations before investing, is rarely made in the short term and overnight. The exit of investors is usually the result of a combination of economic, political, and managerial factors that gradually make their continued presence impossible. These decisions are made after a careful examination of risks and opportunities. But why Iran? What structure does Iran's dual oligarchic economy have? The decrease in purchasing power and the difficulty of the 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 affected companies' profitability and diminished the attractiveness of investing in the Iranian market. Iran has also consistently ranked among the bottom countries in international business environment indices. According to the latest business environment ranking by the British group "Economist Intelligence Unit," Iran ranked 81st among 82 countries from 2014 to 2018, with only Venezuela faring worse; however, in the new ranking, Iran's name is not even listed among the countries, indicating a worsening business situation in the country. In the World Bank's ease of doing business ranking, Iran is positioned 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 rate of capital formation over the past decade is evidence that not only foreign investors but also domestic capital is exiting Iran. A report from the Economic Research Department of the Chamber of Commerce indicates that the average annual growth rate of investment in the 2010s was negative 4.7 percent, and the amount of actual investment decreased from 171 trillion tomans in 2011 to 100 trillion tomans by the end of the decade. For this reason, the 2010s have been dubbed the "lost decade" in Iranian economic circles. The "capital account" index is one of the key indicators that expresses 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 exiting. According to official reports, the trend of capital outflow from Iran has notably intensified since 2015, peaking in 2017 coinciding with the United States' exit from the JCPOA; in that year, the net capital account in Iran was more than negative nineteen billion dollars. The changing laws and the phenomenon of "shadow governments" have further obscured the business environment in Iran. Foreign companies that operate based on transparency and healthy competition find it increasingly difficult 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 interference of unofficial entities, such as companies affiliated with security and religious institutions, has also added to the complexity of the economic landscape. Such interventions, sometimes manifested in sudden changes in laws or the creation of monopolies, have eliminated the possibility of transparent and competitive economic activity. One of the most famous examples of shadow government and security institutions' interference in foreign investment in Iran is the story of the opening of Imam Airport in 2004. While the Turkish-Austrian company "TAV" was supposed to construct all phases of this airport within two years, the Revolutionary Guards blocked the runway on the opening day, preventing other planes from landing and taking off, thus nullifying the contract. The subsequent phases of this airport have still not been completed after two decades. Trump's return and international pressures Some speculate that the exit of foreign investors is linked to Donald Trump's return to the presidency of the United States. Mr. Trump's return increases the likelihood of heightened international pressures and sanctions against Iran, and since many multinational companies that have invested in Iran also have extensive operations in Western markets, continued cooperation with Iran may entrap them in Trump's strictures. For these companies, remaining in Iran may come with the risk of losing more lucrative opportunities in Western markets or facing heavy fines. Are opportunities lost forever? Many experts and representatives of the private sector warn about the intensifying wave of foreign investors leaving Iran. Farshid Farzanegan, the head of the Iran-UAE Joint Chamber of Commerce, considers this a sign of "foreign investors' concerns" about the country's economic situation, stating, "The exit of foreign brands is a warning bell for Iran's economy." However, some government officials attempt to downplay this phenomenon. Recently, Rouhollah Abbaspour, a member of the Industries and Mines Commission, responded to the exit of foreign investors by saying, "Let them go! What challenge will arise? What is a mosquito that its blood pressure matters?" The long-term consequences of foreign investors' exit from Iran, in a situation where there is no bright outlook for attracting new investments, have become concerning. Attracting foreign investments under normal conditions could have alleviated some of Iran's major economic challenges, such as the energy crisis, budget deficits, and inflation, but 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 slipping away.