Designating Tehran Stock Exchange Would Increase Washington’s Leverage

The main index of the Tehran Stock Exchange (TSE) has plummeted 40 percent from the all-time high it reached in early August, while institutional investors face allegations they exploited government ties to manipulate share prices. The Trump administration may soon designate the TSE for violating U.S. sanctions, since the TSE hosts several companies already under terrorism sanctions and supports other firms owned by Iran’s Ministry of Defense and the Islamic Revolutionary Guard Corps (IRGC).

The extraordinary returns of the TSE index have been the only positive indicator for Iran’s economy, which is now in its third consecutive year of recession as inflation has risen sharply and the value of the national currency has collapsed. With few available hedges against inflation, the TSE has absorbed vast amounts of wandering liquidity, creating a bubble as share prices diverged from underlying value.

Before adjusting for inflation, the TSE’s main index has risen 1,265 percent since the United States withdrew from the Iran nuclear deal in May 2018. In dollar terms, this still represents a gain of 225 percent, whereas the Dow Jones Industrial average returned 10 percent over the same period, as compared to 22 percent for the S&P 500.

Yet the index is now falling almost as fast as it rose. One month after the slide began, the government attempted to protect the bubble via an infusion of hard currency, but to little effect.

The entity in charge of exchange markets in Iran is the Securities and Exchange Organization (SEO), which also oversees the country’s Energy Exchange, Commodities Exchange, and similar markets. So far, the United States has not designated any of them. After Washington designated several TSE-listed companies, the exchange continued to provide them support. It also provides support to the subsidiaries of other designated entities.

The TSE listing of companies owned by the IRGC and Ministry of Defense is also a source of concern because both are involved in proliferation of weapons of mass destruction and support for terrorism. The State Department has also designated the IRGC as a Foreign Terrorist Organization. Tehran also uses the Energy Exchange to bypass oil sanctions, while the Commodities Exchange plays a similar role for other sanctioned industries, such as the petrochemical and metal sectors.

Despite sanctions, foreign investors are active in the TSE. In February, Bahador Bijani, advisor to the SEO for international affairs, estimated the value of foreign investment in TSE-listed companies to be close to half a billion dollars at the official exchange rate, or $150 million at the unregulated market rate. According to Bijani, a significant portion of this investment belongs to Iranian expatriates. Designating the TSE would reinforce warnings to international investors that moving into the Iranian market is a risky venture.

Sanctions would have a disruptive effect on the TSE because it relies on foreign technology and expertise to build its trading infrastructure. Over the last few months, the exchange has faced significant technical problems in handling massive injections of liquidity and the ever-increasing number of trades, bids, and transactions associated with that inflow. In August, Hassan Ghalibaf Asl, CEO of the SEO, said his organization was negotiating a deal with a foreign company to buy the required infrastructure.

Corruption also threatens the TSE. Last month, Amir Hossein Ghazizadeh, the parliament’s deputy speaker, warned institutional investors with government ties that parliament and the judiciary would look into allegations that those investors manipulated prices. According to Ghazizadeh, these government-connected investors pumped and dumped shares, which harmed many ordinary investors. The deputy speaker also said these institutional investors were now buying back at much lower prices the assets they sold to ordinary investors.

By designating the SEO, the TSE, and other SEO-affiliated companies for providing material support to designated and terrorist entities and engaging in sanctions-busting activities, Washington would send a strong signal to foreign investors that the TSE is not a safe place to invest, and would limit the further technical development on which these exchange markets depend for additional growth.

Saeed Ghasseminejad is a senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP) and Iran Program. For more analysis from Saeed, CEFP, and the Iran Program, please subscribe HERE. Follow Saeed on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP and @FDD_Iran. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.