Iranian businesses take stock after Soleimani assassination

Bourse and Bazaar | Maziar Motamedi: Iran’s business community is taking stock after the assassination of Major General Qassem Soleimani while the possibility of a direct conflict with the United States threatens serious consequences for an already beleaguered Iranian economy.

The economic impact of Soleimani’s death was first felt in currency markets on Saturday, the first day of the working week in Iran. The dollar was priced at about IRR 133,500 before currency markets opened, but jumped to IRR 137,500 by Saturday’s close. On Sunday, the dollar appreciated further against the real to close at IRR 139,500, marking a 4.5 percent drop in value over the two days. The Iranian rial has stabilized over the last year after losing more than 60 percent of its value in 2018.

Similar volatility was could be seen in Iran’s main stock market, which had made significant gains over the last year. TEDPIX, the main index of the Tehran Stock Exchange (TSE), closed at 367,334.20 on Saturday, down by 4.6 percent. It dropped another 1.4 percent by Sunday’s close to reach 362,259.30.

Both the currency market and stock market saw further losses on Monday, the final day of a three-day period of mourning. Millions of Iranians have taken to the streets of Iran’s major cities to participate in funeral processions.

Supreme Leader Ali Khamenei has vowed to exact “severe revenge” for Soleimani’s death. Secretary of the powerful Supreme National Security Council Ali Shamkhani said Sunday that Iran’s “response to this crime will certainly be military, but won’t be limited to military efforts.”

Trump has doubled down on the assassination, using Twitter to threaten the destruction of 52 targets in Iran, including sites important to the “Iranian culture.” Perhaps indicating his knowledge of the target list, Senator Lindsey Graham suggested the president should target Iran’s oil refineries in further airstrikes.

The economic ramifications of a direct conflict with the United States would be serious. But even absent war, the heightened tensions and greater uncertainty will have an impact on the business environment in Iran.

“We are now in a state of limbo where it is unclear what will happen next,” said market analyst Hamid Babalhavaeji.

Babalhavaeji told Bourse & Bazaar he is indeed worried about a potential armed conflict, but also pointed out that Iran’s economy is already in a state of economic war, gripped by high uncertainty and confined to short-term strategies.

Iran’s economy has struggled in the face of a volatile currency and high inflation since the US unilaterally withdrew from the JCPOA nuclear deal and reimposed secondary sanctions last year.

As to whether foreign companies currently working with Iran will be discouraged continuing their dealings as tensions rise, Babalhavaeji believes only a direct conflict touching Iranian soil would have a meaningful negative impact.

In his view, the economy’s key vulnerability is disruptions to the flow of trade through Iran’s southern ports in the Persian Gulf. “But for now, the main issue continues to be sanctions and challenges in transfer of money,” he said.

Iran’s difficulties in international banking have been compounded by its slow progress in implementing an action plan set forth by the Financial Action Task Force (FATF).

In October, the intergovernmental global standard-setting body for anti-money laundering and combating terrorist financing body renewed the suspension of active countermeasures against Iran, but placed a fast-approaching deadline for further progress on legislative reforms.

“If before February 2020, Iran does not enact the Palermo and Terrorist Financing Conventions in line with the FATF Standards, then the FATF will fully lift the suspension of counter-measures and call on its members and urge all jurisdictions to apply effective counter-measures,” the organization declared.

In the weeks prior to the Soleimani assassination, there appeared to be progress in getting the two outstanding bills passed. The Expediency Council, a body that arbitrates disputes between Iran’s parliament and the Guardian Council, had blocked implementation of the bills, arguing that they threatened national security.

But aggressive lobbying by the Rouhani administration and stakeholders in the business community had sought to explain the risks of not passing the required legislation by the mid-February deadline. Pedram Soltani, vice chairman of the Iran Chamber of Commerce, Industries, Mines and Agriculture, had revealed that the governor of the Central Bank of Russia had informed the governor of Iran’s central bank, Abdolnasser Hemmati, that Russian banks would be unable to work with Iranian banks should Iran fail to implement the FATF reforms.

The assassination of Soleimani and Iran’s unfolding national security crisis, will likely halt efforts to enact the Palermo and Terrorist Financing Conventions. Iranian business leaders hope that FATF member states recognize the impossibility of passing such sensitive reforms in the wake of the unprecedented American airstrike, granting more time for reform.

Ali Khosroshahi, an executive vice president at Sepehr Investment Bank, thinks the repercussions of Soleimani’s assassination should be viewed in the context of Iran’s existing economic isolation, which has left companies battling significant financial constraints.

“We are already in war conditions from an economic standpoint. This event has only made things more difficult and increased tensions alongside a whole set of other conditions,” he said.

Khosroshahi  expects that if a major political breakthrough—which he considers unlikely—does not materialize, Iran’s economy will continue to experience high inflation at least until the end of the next calendar year in early 2021.

Speaking on background given the sensitive nature of the topic, a board member of a large Iranian manufacturing firm said that his company has yet to do formal contingency planning around further escalation, but that so far there “hasn’t been any noticeable effect on business as the events have yet to affect material or financing flows.”

The board member suggested that while “what happened wasn’t expected by anyone” the risk of conflict was already “accounted for” in Iranian markets. In his view, it’s global investors that have yet to properly “educate themselves about the growing risks” as Trump grows more erratic.

As financial economist Peter Dragicevich told Bloomberg, “Everyone got comfortable in that fact that the truce in the trade war had come through and the outlook for 2020 looked a little bit better and then we had another geopolitical reminder come through.”

The US-Iran tensions are “going to be a big driver of markets in the short term,” he added.