A shopkeeper counts Iranian bank notes at his shop in a bazaar in Tehran on Feb. 25, 2012. (Raheb Homavandi/Files/Reuters)

This post is part of the “Iran and the Nuclear Deal” symposium.

That new market smell is in the air. Tehran’s hotel ballrooms are filling up with visiting delegations of European and American investors who hear tea-fueled assurances of long-term profits before shuttling off to the tourist sights in Shiraz and Isfahan. The London-based asset management firm Charlemagne Capital recently announced a partnership with Iran’s Turquoise Partners, an equity fund that invests in the Tehran Stock Exchange. If Charlemagne is knocking at the door, what’s next? Alexander the Great LLC? As a nuclear deal with Iran moves closer to realization, foreign business is exploring how to cash in.

Yet all of this attention is not as new as we think. While sanctions most severely affected the economy after 2011, Iran’s neighbors in Asia never fully cut off economic ties, no matter how much U.S. arm-twisting occurred behind closed doors. Turkey and Iran recently implemented a tariff-reduction agreement to increase cross-border trade. Chinese cellphones pour over the border along with Pakistani cigarettes and Korean washing machines. Iraq’s southern cities are being reconstructed with Iranian steel and cement. The Emirati conglomerate Majid al-Futtain operates a garish hypermarket in Tehran’s western suburbs. During trips to Iran between 2011 and 2013, even with European capital flight, I’ve run into Indian petrochemical executives in Ahvaz, Chinese construction honchos in Yazd and Russian mining magnates in Tabriz.

Even with the cordon sanitaire of sanctions, then, Iran’s market autarky was overstated. One of the ironies of the Mahmoud Ahmadinejad era (2005-2013) was that the polarizing president opened the borders to consumer imports at the same time his government pumped unprecedented levels of cash into the economy. In 2006, my Turkish tailor in downtown Tehran asked me to bring a hard-to-get premium brand olive oil from Istanbul for his wife’s beauty routine. In 2011, I could pick up the same olive oil at any Tehran corner bodega. According to Iran’s Central Bank, the absolute value of imports of goods and services, controlling for inflation, rose every year from 2005 to 2011 and then finally began to shrink, but even in 2012/13 the total value was higher than a decade prior. This wasn’t necessarily healthy for the economy, however, and the giddy bubble of consumption and speculation made the ensuing crash and recession over the past three years all the more painful. Faced with expulsion from global financial markets, an embargo of oil exports and a run on the currency, the Ahmadinejad government countered international pressure with tactical bluster rather than coherent strategy, while his allies went to defeat at the polls.

As the government of President Hassan Rouhani is slowly sifting through the rubble as it negotiates for a lifting of sanctions, then, the Iranian economy still looks quite different today than it did 10 years ago. This transformation has been largely misunderstood. Contemporary portrayals of Iran’s economy fall into a rudimentary trap which social scientists are taught to recognize in the first year of graduate school: selecting on the dependent variable. U.S. analysts read, for instance, that Iran’s economy is controlled by the contracting arm of the Iranian Revolutionary Guards Corps (IRGC), the Seal of the Prophets Construction Headquarters, or the Office fund of Leader and Supreme Jurist Ali Khamenei. If one looks for particular activity in the Iranian economy linked to shady state organs, one can find it in spades. The problem occurs when one only looks for these activities and ignores everything else. The result is analysis via rumor mill and scholarship via scaremongering. State-linked funds in Iran, including ones connected to the IRGC or the military, are unquestionably part of the economic scene. Yet by selecting on the dependent variable – in Iran’s case, only searching for pre-determined actors in the economy and turning a blind eye to other actors – we miss out on the larger story.

Over the past 10 years, enormous chunks of ownership in Iran’s state-owned enterprises were transferred into what many Iranian economists refer to synonymously as the “quasi-governmental” or “pseudo-private” sector. This large middle economic stratum is not under the steely hand of one monolithic organization sitting at the country’s commanding heights. Nor gripped by the inky tentacles of 10 organizations. Nor entangled in the spider web of 50 organizations. Since most analysis selects on the dependent variable, Iran scholars do not know exactly how many quasi-governmental funds, foundations, holding companies and investment groups exist in Iran, nor do we know their relative share in key economic sectors. As much as we may sympathize with the motives, we cannot get an accurate picture by simply repeating the accusations of opposition politicians or activists when claims about Iran’s complex economy are heatedly thrown around in electoral campaigns or journalistic jousting.

So what to do? Former deputy industry minister and reformist politician Mohsen Safai Farahani stated last summer that there are at least 120 such economic entities, which control in total around 50 percent of Iran’s gross domestic product. It is as good as guess as any, since there is no existing systematic study of Iran’s quasi-governmental sector. We know this sector greatly expanded in large part through the transfer and sale of state assets. At a very abstract level, we can see this shift using data provided by the Iranian Privatization Organization. As I document in a forthcoming book chapter, controlling for inflation, about 3.5 percent of the total value of state enterprise transfers occurred under President Akbar Hashemi Rafsanjani (1989-1997), 6 percent under President Mohammad Khatami (1997-2005) and a whopping 90.5 percent under President Ahmadinejad (2005-2013). These shares hardly sold to the private sector at all. Instead, they mostly were transferred to the semi-governmental sector. But what does that really mean?

At Princeton University’s Center for Iran and Persian Gulf Studies, our research team has begun to map out Iran’s current economic structure using a different sort of method. We are examining recently available data from the Tehran Stock Exchange (TSE) without pre-existing assumptions of ownership and economic control by any single political entity. As we cluster this raw data into linkages between different state, quasi-public and private organizations, we will be more able to determine what corporate governance looks like among Iran’s top 500 companies. Since our data on institutional shareholders comes from 2013 and 2014, and foreign capital has barely penetrated this large tier of the economy, it may provide us a more systematic assessment of key economic sectors before sanctions are lifted and foreign direct investment arrives in force.

Our project is in the nascent stage, but preliminary results are telling. Many public sector companies were forced to put up large blocs of shares on the TSE during the Ahmadinejad government’s drive for “privatization.” Who bought them? Take Iran Khodro – the largest automaker in the country – which was required to sell off shares under the previous government. In 2013-2014, Iran Khodro’s main institutional shareholders – defined by the TSE as any entity that holds over 1 percent of company shares – included:

  • Negar Nasr Investment Co., linked to the Basij Cooperative Fund
  • The Civil Servant Pension Fund, a large investment company for state employee pension contributions
  • The Industrial Development and Renovation Organization, a public conglomerate that pre-dates the 1979 revolution
  • Mellat Bank, a major semi-public bank which an European Union court ruled in 2013 was unlinked to Iran’s nuclear enrichment program
  • Tadbir Investment Co., linked to the Imam’s Order, a.k.a the Leader’s Office
  • The Social Security Investment Company, a massive investment company for private and semi-public sector employee pension contributions
  • Two private-sector investment firms
  • Iran Khodro’s own investment company, Samand

This is just one example, albeit from an enormous corporation, but we are finding it to be a common pattern. Over the past decade, state transfer of Iran’s public sector companies seems to have been channeled toward organizations whose member constituencies had been produced alongside the state itself, whether large semi-public pension funds, cooperatives attached to “revolutionary” institutions like the IRGC, semi-public banks or holding companies fashioned by these very companies to protect their own stock and prevent ownership dilution.

Variants of this story have been present in many developing countries, from Japan’s “stakeholder” model of corporate governance in the 1960s, to chaebol business conglomerates in 1970s South Korea, to military investments in industrial zones during the 1980s in Turkey and to Brazil’s public pension fund capitalism in the 1990s and 2000s. If this is a major pattern in Iran’s ongoing economic transformation, then it may look messy and unproductive, but it is not distinctive to the Islamic Republic. Given the above, the implications of a nuclear deal for Iran’s political economy are twofold. First, it is unlikely that a single bloc of domestic economic ownership by itself is coherently organized enough to push Iran’s politics sharply in any direction. Second, the cross-cutting nature of inter-firm and intra-firm ownership means that foreign investment is going to have to negotiate with the hundreds of economic brokers in Iran’s semi-public sectors, not just powerpoint-wielding private entrepreneurs, in order to cash in on key markets.

Kevan Harris is a sociologist and associate director of the Center for Iran and Persian Gulf Studies at Princeton University.