As Iran’s 2005 presidential election approached, a broker active in Tehran’s stock exchange was downbeat. “Pessimists look at the elections and see no new ideas and no new faces,” he told me. “They worry that pressure from outside means tighter rule at home. And that, in turn, means more bad politics, more bad economic policy and no markets.” Five years later, his words appear prophetic. Expanded economic sanctions imposed by the United States and — to a lesser extent — the United Nations have curtailed Western investment in Iran’s economy, strengthening the role of the state. The conservative president Mahmoud Ahmadinejad has presided over a crackdown on the reformist opposition and reversed the sluggish economic liberalization that took place under the previous president, Mohammad Khatami. Strange, then, that the Tehran stock exchange (TSE) should be at record levels, with the most-quoted index, Tepix, reaching 15,361 in the third week of July, above even the bull market that peaked at 13,882 in late 2004. But today’s “boom” at the TSE is very different to 2003 and 2004. In those days, expatriate money was flooding back, feeding rising prices in stocks and real estate. At the same time, private banks were expanding, Western energy companies were signing deals for developing Iran’s oil and gas resources, and Tehran was in talks with the European Union over its nuclear program.
The current rise of stocks in Tehran takes place in an exchange more and more dominated by state, or quasi-state bodies, which have proved adept in exploiting the Ahmadinejad government’s privatization policies. Funded to a greater or lesser degree by oil revenue, the state sector is far better placed to survive sluggish economic growth, currently at 2 percent according to the International Monetary Fund. The retirement fund of the Revolutionary Guards was also involved in the consortium that last year bought a 50 percent plus one share stake in the state-owned Telecommunications Company of Iran (TCI).
“The government and quasi-government bodies have made the TSE far more of a co-operative than a competitive game,” an Iranian economist told me. “As a general rule, in developing or risky economies cash dividends are more prevalent [than retained earnings] and pay-out ratios higher. Buying and selling stocks can help increase an extraordinary income to make up for declining profits from normal businesses. And of course, we should not forget that high oil revenue over recent years, despite the falls since 2008, has built up greater liquidity and that there are a limited number of investment opportunities in Iran.” Isolation cuts both ways, and sanctions make Iranians reluctant to invest abroad. Government and quasi-government bodies are especially cautious. Another factor in the bourse’s boom, said the economist, was a perception that political unrest after last year’s disputed general election had died down: “The surge in the TSE began around five months ago as people perceived an apparent stability after nearly a year of uncertainty.” The buoyancy of the Tehran stock market has also attracted liquidity from falling markets in the region and elsewhere. Turquoise, an investment firm majority-owned by the London Stock Exchange, offers an Iran equity fund and has described the TSE as “one of the most under-valued emerging markets in the world.”
Traders detest the growing politicization of the Iranian economy. Many Western media outlets described last month’s protests in a Tehran bazaar against tax rises as a potential return to the strikes that helped topple the Shah in 1979. On the other hand, Hussein Shariatmadari, editor of the leading conservative newspaper Kayhan, recently wrote that officials were slow to take action against “a handful of prosperous capitalists” in the bazaar. Shariatmadari has been a strong supporter of Ahmadinejad and is clearly in no mood to pander to advocates of lower taxes or market liberalization.
Across the board, sanctions weaken the private sector. If the US is successful in blocking the insurance of goods being transported in and out of Iran, then the government may well take over the responsibility.
As the broker said back in 2005, “more bad politics, more bad economic policy, and no markets.”
GARETH SMYTH is the former Tehran correspondent for the Financial Times