Identifier
Created
Classification
Origin
06DUBAI1873
2006-04-02 07:55:00
SECRET
Consulate Dubai
Cable title:  

TEHRAN CHANGING POLICY TO ATTRACT FOREIGN INVESTMENT

Tags:  IR ECON EFIN PGOV PINR 
pdf how-to read a cable
VZCZCXRO0316
RR RUEHBC RUEHDE RUEHKUK RUEHMOS
DE RUEHDE #1873/01 0920755
ZNY SSSSS ZZH
R 020755Z APR 06 ZDS
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 9545
INFO RUCNIRA/IRAN COLLECTIVE
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHDE/AMCONSUL DUBAI 2476
S E C R E T SECTION 01 OF 02 DUBAI 001873 

SIPDIS

SIPDIS

C O R R E C T E D C O P Y - CLASSIFICATION CHANGED
FROM CONFIDENTIAL TO SECRET

E.O. 12958: DECL: 04/1/2016
TAGS: IR ECON EFIN PGOV PINR
SUBJECT: TEHRAN CHANGING POLICY TO ATTRACT FOREIGN INVESTMENT

REF: 05 DUBAI 4989

DUBAI 00001873 001.3 OF 002


CLASSIFIED BY: Jason L. Davis, Consul General, Dubai, UAE.
REASON: 1.4 (b),(c),(d)


S E C R E T SECTION 01 OF 02 DUBAI 001873

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SIPDIS

C O R R E C T E D C O P Y - CLASSIFICATION CHANGED
FROM CONFIDENTIAL TO SECRET

E.O. 12958: DECL: 04/1/2016
TAGS: IR ECON EFIN PGOV PINR
SUBJECT: TEHRAN CHANGING POLICY TO ATTRACT FOREIGN INVESTMENT

REF: 05 DUBAI 4989

DUBAI 00001873 001.3 OF 002


CLASSIFIED BY: Jason L. Davis, Consul General, Dubai, UAE.
REASON: 1.4 (b),(c),(d)



1.(C) Summary: In a bid to inject capital into the Tehran Stock
Exchange (TSE),Iran will allow up to 10 percent foreign
investment in the market. The Iranian Majles (Parliament) has
also recently approved a bill to allow foreign capital for the
energy sector. According to one theory, Rafsanjani and his
circle deliberately pulled out massive funds from the market
following Rafsanjani's defeat to Ahmadinejad in an attempt to
cause a crash, hoping that this might force Ahmadinejad and his
supporters out of office. End summary.

Seeking Foreign Capital to Boost Failing Economy
-------------- ---

2.(C) According two Dubai-based Iranian businessmen, Ahmadinejad
announced in late December that Iran would allow ten percent
foreign investment -- equivalent to $40 billion -- in the Tehran
Stock Exchange (TSE). According to Western press reports from
late-January 2006, the head of the TSE, Ali Salehabadi, told an
Iranian press outlet that Ahmadinejad's administration had
ratified the Foreign Investment Bylaw - a move that would "pave
the way for the participation of foreign investors in the
capital market." He claimed that prior to the move there had
been no regulations for foreign investments. In early January,
Tehran authorized three Asian investment groups to invest a
total of 250 million Euros in the market, according to the
Iranian Students News Agency.

3.(C) Western and Iranian press reports from May and June 2005,
however, indicate that the Foreign Investment Bylaw was actually
ratified by the cabinet under reformist President Mohammad
Khatami. Soon after this ratification, the first batch of
foreign investors reportedly arrived from an unspecified Arab
country. It is unclear why there is such a discrepancy in the
dates of the ratification of the bylaw. Our contacts claimed the

decision was an attempt to inject capital into the "failing"
stock market after a loss of "almost a third of its value" since
Ahmadinejad's election in July 2005. (As reported reftel, the
stock market fell 11 percent in the months preceding
Ahmadinejad's election, and another 19 percent subsequently;
since then (i.e. since October 2005) it has fallen another two
percent.) A separate Iranian businessman from Tehran, who was in
Dubai for a visa, recently told Conoff that the government had
actually increased the level of permissible foreign investment
to twenty percent, but we have seen no press reporting to
confirm this.

4.(C) The Iranian government also appears to be seeking
additional foreign capital in order to bolster the floundering
Iranian economy. According to Iranian press reports, the Majles
(Parliament) announced on March 5 that it had approved a bill to
allow the Energy Ministry to use up to USD 800 million in
foreign loans to finance water supply and water conveyance
projects. Moreover, the Majles Economic Commission announced on
March 13 that it plans to set up a "special economic committee"
with a mandate to remove obstacles to foreign investment.

5.(C) (U) Given the current political climate, it is unclear
whether these moves will attract needed foreign investment.
There is already a strong perception of risk with regards to
investing in Iran, particularly in light of Iran's referral to
the UN Security Council. In mid-January, two Swiss banks -- UBS
and Credit Suisse -- announced they were pulling out of Iran
because the economic risks of continuing to operate there were
too high. According to the Middle East Economic Digest, their
decision was indicative of broader concerns among international
financiers about increasing their exposure to the Iranian market
in the current climate.

6.(C) A young Iranian who works at the TSE told Conoff last
year's stock market crash had been caused by the political
situation, especially the nuclear standoff. He did not believe
the financial situation would improve until Ahmadinejad was
replaced by someone more like former presidents Mohammad Khatami
or Ali Akbar Hashemi Rafsanjani. He said, however, that he does
not currently know of a strong reformer who can lead the
government. A board member of a private Iranian investment
company told Conoff on March 13 that stocks on the exchange
continue to fall, mainly as a result of the current political
climate. Unfortunately, he stated, many Iranians have lost "tons
of money" as a result of the crash; the situation, he said,
would not change until the political situation improved. (Note:
When asked where Iranians are putting their money instead of the
stock market, the board member claimed most are investing in
Islamic Republic of Iran bonds as the rate of return was
approximately 15.5 percent, stating that the return was so high

DUBAI 00001873 002.3 OF 002


largely because inflation is high -- about 13 percent.)

Crash Caused by Rafsanjani?
--------------

7.(S) The first two businessmen both maintained that Rafsanjani
and his supporters had pulled their sizeable investments from
the TSE deliberately, in an attempt to cause such a huge market
loss that Ahmadinejad and his supporters would have no choice
but to withdraw from power. Although the stock market did tumble
approximately 19 percent (2389 points) in the weeks after
Ahmadinejad was elected last summer (reftel),Ahmadinejad and
his supporters have not yet been forced out of office. The
businessmen were unsure whether the entire group had actually
pulled all its money out of the market, or whether some of its
money remained. One of the businessmen told Conoff that he
wanted to check and see whether a wealthy Dubai-based Iranian
businessman (a consulate contact and holder of an E-2 visa),Mr.
Taghi Ganji, had pulled his money out of the market. He claimed
that that would be a key barometer of the group's commitment to
pulling its money out, since Ganji enjoyed a close relationship
with Rafsanjani. We have not seen Taghi Ganji since this
conversation, but in an earlier conversation, he claimed to have
lost $400 million in Iran last year in stocks and real estate
and expects to lose the same this year -- suggesting that he has
not pulled out of the market. (Indeed, we have nothing to
substantiate the theory about a Rafsanjani plot, and it is
likely nothing more than one more conspiracy theory from a
country where conspiracy theories are a national pastime.)

8.(C) Both businessmen also claimed that Ahmadinejad had
threatened to criminalize the withdrawal of funds from the TSE,
but dropped the threat after being reprimanded by Supreme Leader
Khamenei. According to Iranian and Western press, Ahmadinejad --
frustrated with his economic advisors' inability to solve Iran's
current economic malaise -- reportedly told them during a
cabinet meeting in late October 2005 that the solution was to
"frighten speculators." Ahmadinejad allegedly suggested, "If we
are permitted to hang two or three persons, the problem with the
stock exchange would be solved forever." (Note: One of the
Dubai-based businessmen claimed that the capital flow out of
Iran had slowed in the past few months, but did not clarify the
basis of this conclusion or whether he believed Ahmadinejad's
threats had played a role.)

Comment
--------------

9.(C) It is too early to say whether the reported changes in
policy regarding foreign investment will help the ailing Iranian
economy. In light of Iran's referral to the United Nations
Security Council for its intransigence on the nuclear issue, it
is questionable whether foreigners would be interested in buying
into an economy that is not very stable and may soon be subject
to multilateral economic sanctions. (Numerous Iranians with whom
Conoff has recently spoken on the visa line have expressed
concern that the UN will impose economic sanctions on Iran as a
result of its continued inflexibility on the nuclear issue.) It
is interesting that Ahmadinejad's more ideological bent carries
over into economic and business affairs as well; his threat to
hang stock market speculators was greeted with particular alarm
by cabinet members, according to Iranian press reports. Many
Iranian business contacts tell us that business in Iran
continues to founder; this, along with creeping inflation -
especially on basic commodities - has exacerbated the already
dire economic situation many Iranians currently face.
DAVIS