Host: "In the past week Iran announced that in order to secure cash for it's gas and oil fields, it will once again issue bonds: 1 billion Euros last year and 11 billion Euros this year. What has caused the need for Iran to borrow so much cash?Iran's oil flames need cash to stay lit more than anything else. Many reservoirs remain untouched underground and in order to convert them to oil or gas, they need to first be developed. But U.S. sanctions have caused large international oil corporations to leave these oil fields. The last of them was the Italian corporation ENI which produced 35000 barrels of oil in Iran last year, amounting to 2% of the it's total output. ENI has said that it has completely given up on Darkhoin oil fields. It's not only the westerners but the Russians have no interest in Iranian markets anymore. Russian company LukOil also pulled out of Iran in the beginning of the Iranian new year, again due to sanctions.
And now in order to develop it's oil and gas fields, Iran has turned towards issuance of bonds, also known as the Islamic bonds.
Mrs. Sahar Rad: Common bonds translate to cash that investors provide to governments or other companies based on previously determined profits rates. When the user of this cash invests this money, a part of the profits gained will need to be returned to the investor who provided the cash.
Host: Iranian parliament in it's current year budget approved the government's request for 11 billion dollars worth of bonds (about 15 billion dollars). But the Research Committee of the Parliament has it's doubts on whether they will be able to successfully sell these bonds, thus securing the cash needed by the government. The Research Committee of the Parliament said: "Considering the fact that financial sanctions against the country have increased this year as compared to the year before, the issuance and selling of these bonds will in fact run into major obstacles and challenges". They have designated an annual 8% profit rate for these bonds which could be attractive to many buyers in foreign countries. The median rate for bonds in the U.S. is 1.5% and 3% in Europe. Greece issued bonds with rates of up to 6.5% in order to solve it's financial crisis. And now Iran has stepped in with 8% rate bonds.
At the end of Iranian new year in March, Iran declared that in order to develop South Pars oil fields, it will sell about 1 billion Euros worth of bonds. It was reported that $250 million Euros of these bonds were sold in only half a day. But the same bonds fell victim to U.S. sanctions.
London is where about 70% of bonds around the world are traded. But in this same city, this bank behind me called Bank of Persia, which represents Bank Mellat Iran, has said that because of the sanctions, it is not permitted to sell bonds in the UK.
Most buyers of Iranian bonds come from Persian Gulf countries and Far Eastern countries like Japan and Malaysia. Considering that western countries are not showing any interest in buying Iranian bonds, the question is: will Eastern block countries have the power to buy all of the $15 billion dollars worth of bonds that Iran is offering or not?
Host: We just saw the report. Now we are going to speak with Kamal Aghai to dive deeper into this subject. Mr. Kamal, this is not the first time that Iran has issued bonds. What's the history behind this?
Kamal Aghaii: There is a long history on this dating back to early 1950 Mossadegh era. But what happened after the 1979 revolution, was that because of 'Islamic Banking' and the claim that interests amount to usury, they stopped it. But for the first time, Tehran's mayor sold bonds 15 years ago for Navab project. Following that, other projects started selling bonds for building dams, roads, etc. and it became very popular.
Host: but there have always been problems about the return on investment (ROI)?
Kamal Aghaii: The problem was that there were never reports produced regarding the projects for which bonds were sold. Many believed that since many of these projects were not completed in time and the 3 year period of these projects would come to an end, when investors went to banks to pick up their pay, the banks were forced to buy them back! Another problem was that the profit rates designated for these bonds depended on inflation! Instead of people investing in other areas, everyone was going to invest in bonds!
Host: Well what you just mentioned had to do with internal bonds. What caused Iran to turn to international markets?
Kamal Aghaii: During the second term presidency of Mohammad Khatami Iran sold about a billion Euros of bonds which was well received. At the time Iran was in a different international and economic situation. But recently they decided to sell bonds for oil projects as well. But the problems that Iran faces right now is whether it can even sell them and whether it has been able to find an international financial backing for these bonds. Can it offer these bonds without international financial backings? Are these bonds tradable in international markets? These are problems that Iran faces in selling these bonds in international markets.
Host: With all the problems you pointed to, how practical is it for Iran to sell the 1 billion Euro of last year and the 11 billion Euros proposed this year?
Kamal Aghaii: This seems to be a very difficult task because usually oil producing countries do not issue bonds! It's usually the other way around where they start investing in other countries. Well Iran in recent years has faced serious problems attracting foreign investments. The way it worked was that foreign investors would step in and with 'financing' or 'buy back', they would invest in oil projects. The investor would then take the principal amount and his profits when oil was produced.
The investors would also bring in technology with them. But now Iran faces several problems. First the foreign investors are not bringing in investments and second, technology remains a problem.Host: 8% is very attractive! If you had the cash would you buy them here in London?
Kamal Aghaii: Definitely! because here in London if you leave your money in the bank, you get 1% or 2% interest. Same goes for bonds here. If I was sure that I would get 8% interest for 3 years, it's only natural that I would be interested to buy it. But where do I go to buy them? does Bank Mellat sell them here? It looks like Bank of Hamburg and Bank of Istanbul are in the same situation. They cannot sell these bonds. I would probably have to travel to Dubai to be able to buy them.
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