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) 
 
 
 
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