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Financial Advisor Hamid Biglari Explains The Thawing U.S. Business Relationship With Iran

Jun 24, 2016

Financial advisor Hamid Biglari left Iran for the United States in 1977 – two years before the 1979 Islamic Revolution – when his native country produced nearly 6 million barrels of oil per day. In the following decades, Iran’s economy collapsed due to sanctions by the west, and more recently, falling oil prices.

“It turns out that Iran has lost about $135 billion just from the fact that it wasn’t able to produce as much as it did post-sanctions,” Biglari told KGOU’s World Views. But it’s going to lose, over the next five years, about $180 billion. It will lose even more than what it lost during sanctions. So it’s a double-whammy deal.”

Biglari serves as a managing partner at the TGG Group, a Manhattan-based financial advisory firm for Fortune 100 companies. He’s also worked with Citibank, and last year Bloomberg News called him Iranian President Hassan Rouhani’s “go-to guy” in New York financial circles.

Although some sanctions have been lifted following a nuclear deal with the five permanent members of the United Nations’ Security Council and Russia (the so-called “P5-plus-1”), Biglari says Iran still has problems that have to be solved before the country can generate more foreign investment and rebuild its economy.

“If you look at the various elements of what makes it difficult to do business in Iran, one of the most challenging is corruption,” Biglari said. “You need to feed a lot of different hands in terms of getting something done.”

Watch Joshua Landis' extended interview with Hamid Biglari

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JOSHUA LANDIS, HOST: Hamid Biglari, welcome to World Views.

HAMID BIGLARI: My pleasure. Nice to be with you, Josh.

LANIDS: Let me begin talking about Iran today. Explain to us why Iran is important.

BIGLARI: So, there are several reasons for Iran's geopolitical and geoeconomic importance. The first is that it is the 18th largest economy in the world in terms of purchasing power parity. It’s on that basis is about 1.4 trillion, which makes it about eight percent the size of the U.S. economy. It has a population of about 80 million people. And I like to say that Iran is the only G20 country that is not part of the G20. It has been disconnected from the world economy for an extended period of time and I think that we may be at an inflection point in terms of that interaction. The second reason for Iran's importance is it has a highly-educated population. One of the most interesting statistics on that front is that Iran puts out about the same number of engineering graduates every year as the United States -- about 240,000, which puts it fourth in the world after India, China, and the United States. And that is remarkable because all of these countries have many times the population of Iran. So it's a population that is technically-savvy. About two-thirds of the population is below the age of 35 and that population is extremely well-educated. They are internet connected to the rest of the world, and it's a great foundation to build. And the third reason for Iran's importance is that it has the largest hydrocarbon reserves in the world. It has the fourth largest oil reserves in the world after Venezuela, Saudi Arabia, and Canada. And it holds the largest gas reserves in the world. And on a combined basis, there are very few economies that are balanced between both oil and gas. So for example Saudi Arabia has a lot of oil, very little gas, and Qatar has a lot of gas, very little oil. Iran is perhaps the only major energy-producing economy that is balanced across both. And yet despite that, only about a quarter of the economy is based on oil and gas. And this is surprising because most resource-intensive economies have and economy that is much more heavily composed of energy. So in the case of Saudi Arabia, about half the GDP is oil. In the case of Russia, it's about 35 to 40 percent. So for Iran to be a quarter of the GDP means that it has a much more diversified economy than it would suggest. And that is despite the fact that it has been under sanctions and having to create a foundation without the benefit of lots of interaction with the world. So all of those are reasons for its relative importance in the world's economy.

LANDIS: So now that there is this nuclear deal and sanctions are lifted, investors are swarming and looking at Iran, what are they seeing? Those are the strengths. What are weaknesses of Iran?

BIGLARI: So there are several weaknesses. The most important would be what one could characterize as rule of law. Investor protection, minority investor rights, contract and dispute resolution, those mechanisms are not sufficiently well-developed and they need to be much more developed before Iran can handle a significant of foreign direct investment. Doing business in Iran is not easy, and one needs to put that in context of other emerging markets. And the World Bank does a very good job in terms of looking across various elements of doing business and tabulating countries. So right now Iran, out of 190 countries by the World Bank's reckoning, is somewhere in the order 120 or 130 in the world. So it's towards the bottom quartile. Actually as I reflect now it's more like 118th in the world. Russia is 50th -- just so you have a benchmark -- India is 130th, and Brazil about 116th. So despite the fact that that number may look bad, Brazil is about the same as Iran in terms of the ability to do business, and India is worse. And if you look at the various elements of what makes it difficult to do business in Iran, one of the most challenging is corruption, the level of corruption, the fact that you need to feed a lot of different hands in terms of getting something done. And then there's the various elements of dispute resolution, how long it takes to register property, all of those various factors. And it's a sign of the fact that it's not truly a market economy. There's a lot of state intrusion that needs to be changed. And the third area where Iran has a lot of room to grow is capital allocation is relatively inefficient. And that has to do with the fact that the banking system is not well-developed and for much of the previous administration -- the Ahmadinejad administration -- bank interest rates were set by the state and they were set at irrational levels to promote populist policies. And so the nature of bank intermediations -- which is to take money from savers and give it to borrowers -- was broken because the rates weren't set by market supply and demand. They were set by the state and that made it much more challenging. As a result of which there's a large amount of non-performing loans that has accumulated because the financial intermediation has been broken for so long. And that needs to be fixed and Iran needs to have a more independent central bank that makes monetary decisions and regulatory issues. So those are some of the challenges.

LANDIS: Let's talk about oil for a second. As you said, Iran is a monster in the overall global oil markets. It's been producing at a very low rate because of sanctions, because there hasn't been capital investment. Oklahomans -- who are very worried about the price of oil being so low, and it's dealing a devastating blow to our economy -- they're looking at Iran today because Iran doesn't seem to want to play ball with Saudi Arabia, Russia, and others who said that they're willing to freeze the production side because Iran says "look, we've got to get our market share back. We've got an economy to build. We've just come out of sanctions." What's the likely impact of Iran on oil pricing in the next few years?

BIGLARI: Well that's a very important question, Josh, obviously. It's worth just taking a step back. And if you look at what has happened to Iran since sanctions were imposed and you separate from that two dynamics -- one: the fact that sanctions were in place that caused Iran to go to half of its export capacity from around 2.5 million barrels per day down to 1.1 million barrels per day, and then you add to that the fact that oil prices collapsed in the last year or so to the levels that we see them today. If you ask the question: how much did Iran lose purely as a result of the sanctions being in place and how much is Iran losing from the fact that oil collapsed from, let's say in the seventies now down to the thirties? It turns out that Iran has lost about $135 billion just from the fact that it wasn't able to produce as much as it did post-sanctions. But it's going to lose, over the next five years, about $180 billion. I'm saying based on future prices for oil, which is expected to, on a global basis, not get much higher or projected to much higher than about $45, $50 a barrel, even by 2020. It will lose even more than what it lost during sanctions. So it's a double whammy effect.

LANDIS: And Iran produced about six million barrels under the Shah, didn't it?

BIGLARI: It did. In 1979, before the Shah collapsed, Iran was producing six million and was exporting a sizable portion of that.

LANDIS: Could Iran produce six million again? Now it's very mature, of course, fields. In 1908 it began produce oil, feeding the British Navy, and so-forth. So a lot of those fields cost a lot to get the oil out because they're mature. What is the potential for Iranian oil if things worked right and there were capital investments and so-forth?

BIGLARI: Well there are two sides to that question. One is the fact that because of a lack of investment in oil-producing technology, Iran's yield from its oil fields has been drastically reduced from what they should be and what they could be. As a result of which, extraction hasn't actually been as much as it could have been had Iran been operating with efficient technology. Experts believe that, first of all, Iran needs on the order of $200 billion of new investment just to bring its technology up to world standards over the next five to 10 years. And even with that, in light of just general supply and demand balance in the world, it is unlikely that it will be able to get back anywhere near to its production level and its market share in terms of exports. So experts believe that by 2020 it will get back to roughly where it was before sanctions set in in terms of export capacity just by virtue of supply and demand and technological limitations. So we're pretty far away from it getting back to where it was pre-revolution.

LANDIS: Let me switch the topic now to geo-strategic questions. One of the big clouds hanging over Iran is that over the last 30 years Iran has been demonized and it has been in a struggle with the United States, with Saudi Arabia, with the Sunni world. And Iran has been painted as a terrorist state and an aggressive state that has been destroying the status quo in the Middle East. Iran has been building a security architecture that stretches from Lebanon with the growth of Hezbollah and the emergence of Shiite power in Lebanon, but also supporting Bashar al-Assad in Syria. Of course America put the Shiites at the top of Iraq, and that's been very beneficial to Iran. But there is this architecture of what the king of Jordan called "the Shiite Crescent" stretching from Lebanon through Syria, Iraq, and Iran. How frightening should that security architecture be? It cuts the Sunni world in half. Russia is an ally, in a sense, both in Syria and in this strategic arc. How frightening should that be to Americans? And is it likely to harm America or not?

BIGLARI: So another complex question, Josh. I think it's always helpful to look at the other side of the equation because, obviously, we as the United States have a lot of grievances with respect to Iran -- starting from the taking of U.S. diplomats hostage in 79 and 80 to some of the actions that Hezbollah took in Lebanon and Saudi Arabia that resulted in loss of life, to I.E.Ds that killed American military personnel in Iraq. But it's helpful to also understand the grievances that Iran has against the United States. So Iran's popularly elected prime minister who wanted to keep more of Iran's oil wealth inside the country as opposed to have the British take it out was Mosaddegh, and the CIA helped to overthrow Mosaddegh and put the Shah back in power in 1953. Then, during the Iran-Iraq War -- a war of attrition that lasted most of the 80s -- the United States provided both supplies as well as military intelligence to the Iraqis and, very importantly, looked the other way while Saddam Hussein used chemical gas against Iran, killing around 100,000 people. And the United States looked the other way. So the red line that we drew with Assad in Syria somehow didn't exist during the Iran-Iraq War because we didn't like the other side of that conflict. And then when President Khatami, who was president of Iran about 10 years ago, unilaterally halted its enrichment program, the response from President Bush at that time was to call Iran an axis of evil. So every time, from the Iranian point of view, they feel that they have taken a step, it's been rebuffed, and a feeling that the United States, historically at least, has been intent on keeping Iran from having independence and an alternative point of view in terms of the region to the point that we've always looked for regime change. That's the perspective from Tehran. And so, given that narrative, their point of view was they need to achieve their own security in the region. And how have they achieved their security? They've achieved that through proxies and surrogate forces in the Middle East in regions where there's a greater number of Shiites than Sunni. That happens to be in Lebanon, where the number of Shiites and Sunnis are about the same, with the Hezbollah unit. They've done that in Syria. And, obviously, Iraq has now become largely bespoken towards Iran. So you have to step back from this complicated picture and ask the question: how can the picture be changed in a way that pushes it more towards stability? And I think at the end of the day this is going to boil down to the United States respecting Iran's independence and recognizing its rights as a power in the region while, in return, Iran acts in a responsible way to be an actor in favor of stability in the region as opposed to feel pressured and therefore look for adventurism in terms of getting its way. This nuclear deal is going to help the reformist camp in Iran, who do want Iran to engage internationally and behave as a responsible actor in the Middle East, and it undermines the hardline elements, who are deeply suspicious of international engagement and want to maintain Iran in a more isolationist state. So in the long term, I think, if we think in a more subtle way, in a more nuanced way in terms of our foreign policy towards Iran, that is what's going to result in a more stable Middle East. But if we persist on the same set of policies that we've been pursuing for the last 50 years, nothing really is going to change very much.

LANDIS: Let me finish this interview with one final question about Iranian Americans. Iranian Americans have been one of the most successful groups in all of America -- I think only lagging behind Jewish Americans and perhaps Chinese Americans -- in terms of educational achievement, per capita income, all of the intellectual achievement, high degrees. What are the reasons for this tremendous success of Iranian Americans?

BIGLARI: The most important reason, Josh, I think, is that Iranians, going back thousands of years, come from an entrepreneurial culture. The tradition of Iran were the bazaars, where the merchants had to basically build businesses by themselves, figure out how to make ends meet, and be successful in a highly competitive economic environment. That bazaar culture, I think, has created a degree of resilience for cultures of long-standing -- and I put Chinese and Indians and Iranians in the same category. These are all many-millennia-old cultures. They're used to trade. They're used to figuring out how to build a foundation for themselves. And it's not surprising that these same ethnic minorities – Indian-Americans, Chinese-Americans, Iranian-Americans - have ended up being so successful. They haven't relied on handouts; they've had to build a life by themselves. And in the case of the Iranians, Iranian Americans, really after the Iranian Revolution, large numbers of them couldn't go back. They didn't have a safety net here and they had to start from scratch. And they've been able to integrate in the fabric of American society extraordinarily well. And so many of the most successful like Pierre Omidyar, the founder of eBay, people don't even realize that he is of Iranian decent. And I think that it's the culture -- a culture of self-sufficiency and a culture of resilience -- that, for all of these ethnic groups, has resulted in their success.

LANDIS: Hamid Biglari, it's been a pleasure having you at World Views.

BIGLARI: It's a pleasure to be with you, Josh.

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