Iran Unveils New SWF

Ashby Monk

I reported here last month that Iran was considering establishing a new SWF, which would be focused on domestic development,  to replace their old SWF, which was a contingency fund. Yesterday, the government unveiled its plans. According to the Oil Minister Massoud Mirkazemi yesterday:

“It is necessary to invest in the country’s oil and gas development projects, particularly in joint fields with the neighboring states…The National Energy Fund, with the help of the resources of four local banks and the Central Bank, has been established to help finance major parts of the oil industry’s activities…Several rounds of talks were held in this regard and it was approved by the president…”

As this suggests, the new fund is really only focused on developing the resource industry, which is a bit different from their original plan a month ago. Still, Iran’s resource industry does need help. The country is the fifth largest exporter of crude oil, but it has the second largest proven oil and gas reserves. What gives?

Due to geopolitical tensions surrounding its nuclear ambitions, Iran has not been able to attract the foreign investments needed for expansion and modernization. As a way to side-step the problem, the government is apparently creating a new SWF that will have an explicit mandate to invest in the domestic energy sector.

It’s an interesting ploy, but the new SWF will, in my view, create some serious problems for the domestic economy. Specifically, Iran has a serious inflation problem; in 2008 it was well above 20 percent.  In order to contain this, Iran needs macroeconomic tightening; the establishment of a domestic oriented SWF does not fall into the category of “tightening”.

In fact, the whole point of setting up commodity based SWFs is to smooth resource revenues, avoid domestic inflationary pressure, and prevent “Dutch disease”. This is done by investing assets, for the most part, internationally. By taking the oil revenues and then explicitly directing them into domestic industries, Iran may aggravate their economic woes.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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