Investing in Asia – A New Paradigm for Iran

Cash Trapped in India, South Korea and China Turned into Investment. A Historic Opportunity for Iran

By Nader Uskowi

The International Monetary Fund (IMF) reported this week that Iran's economy is growing by 3.2% in 2011. The positive assessment of the Iranian economy reversed IMF’s own prediction of 0% growth made in April. IMF identifies a recovery in agriculture during rising food prices across the globe and higher oil prices as the main factors in the growth of the country’s GDP.

The IMF praised Iran's subsidy reforms, implemented by President Ahmadinejad in December 2010, which resulted in the removal of nearly $60 billion in annual product subsidies, equivalent to 15% of GDP. I have been an early and strong supporter of Ahmadinejad’s subsidy reform program. It will spur additional GDP growth in the coming years.

The publication of the IMF report coincided with other published reports indicating Iran’s serious problems in colleting payments for its crude oil sold to its major Asian customers. This blogger understands that nearly $30 billion of the country’s cash is trapped in India, South Korea and China due to inability of those countries to transfer those funds to Iran because of US banking sanctions. But this problem can be turned into a historic opportunity for Iran. Let me explain how.

In the past six years or so, in writings and in discussions with the country’s senior economists and policy makers, I have argued that Iran could not afford to regard its oil revenues as the never-ending hard currency source for its budgetary needs. Iran needs to invest a significant portion of those revenues, generating income, with the government receiving its share by taxing the income so generated. The investments, I have argued, should include foreign investment. Now that considerable amounts of the country’s cash are trapped in major Asian markets, and in spite of that the country’s economy is growing at a healthy rate, as indicated by the IMF report, the Iranian government should turn these oil payment problems into a historic opportunity to start major investments in India, China and South Korea, in the tune of $30 billion as a starter.

To be successful, Iran needs to find a niche for its investments that would be common in those three countries. I believe automobile industry is the solution. Iran is already having success with its domestic car production. It can use nearly $5 billion in cash it now has in South Korea as the initial investment in a major Korean car manufacturing to gain added technology needed in today’s automobiles. It can use its nearly $7 billion cash in India and reportedly nearly $20 billion in China to start joint ventures with the local automobile producers to build its brands in the two countries that will be growing for years to come, with families getting rich enough to purchase multiple new cars. The profits generated could be reinvested in these projects with huge implications for Iran’s growing market shares in the fastest growing industry in top two fastest growing economies. This would be a new paradigm for the country, a historic opportunity that the government should not miss.