Last weekend, the Obama administration and the European Union lifted sanctions against Tehran, less than a year after Iran and six world powers reached a nuclear deal. In preparation, the Islamic Republic has for months waged a charm to bring foreign investors to the Tehran Stock Exchange (TSE). Tempting as that may be — Iran is the last large, untapped emerging market — most of the country's publicly traded companies are owned or controlled by the Islamic Revolutionary Guard Corps (IRGC). U.S. legislation punishing such investment is thus a necessary step to prevent the IRGC from benefiting from the flow of foreign capital sure to follow now that restrictions against foreign investment in the Iranian economy are gone.
That's why the U.S. Congress should increase the cost of investing in the TSE by imposing sanctions on any company that buys into firms in which the IRGC is a shareholder. And the ownership threshold to determine whether Iranian publicly traded companies qualify as IRGC owned or controlled should not be 50 percent or 20 percent, but anything above zero. In many cases, former senior IRGC commanders who have never been subjected to sanctions sit on the boards of these companies and are thus able to influence corporate governance to the Guard's benefit. Besides, stock ownership generates substantial revenue through dividends — foreign investment into these companies would drive up their market value, leading to increased income for the IRGC.
The IRGC's presence in the automotive sector is a case in point. Iran is the largest producer of cars in the Middle East. Between vehicles and the after-sales market, Iran's automotive industry employs, directly and indirectly, 840,000 workers and is second in size only to the country's energy sector. The Guard invests in five automotive companies listed on the TSE: Bahman Group, Iran Tractor Manufacturing, Iran Tractor Foundry Company, Motorsazan Diesel and Gas Engines, and Iran Casting Industries.
Bahman Group is Iran's third-largest carmaker and the proprietor of a license to produce Mazda cars for the domestic market. It currently has a market value of some $250 million. It controls 24 companies, including a share in Bahman Investment Co., another publicly traded company, which has a market value estimated at $80 million. The board of Bahman Group has five members, representing five companies, four of which are IRGC-owned.
Nor is this the only area of IRGC investment. Iran's mining sector is an important source of revenue for the country's economy as well as a supplier of raw materials for its developing industry. According to the Organization for Investment Economic and Technical Assistance of Iran, "Iran has the world's largest zinc reserves and second-largest reserves of copper."
The publicly traded Iran Zinc Mines Development Company (IZMDCO) is the principal owner and producer of Iranian zinc, with an $80-million market value and control of a significant portion of the country's extractive activities. With the lifting of sanctions against the Islamic Republic's banking and transport sectors, Iranian metals and minerals exports will become a more affordable option for international buyers. IZMDCO, which is majority-owned by the IRGC, will thus benefit from the general climate of economic improvement, access to modern extraction technology, financing, cheaper delivery costs and potentially foreign investment. Its revenues will go up and so will shareholders' dividends.
A similar case is Iran's largest aluminum producer, Iran Aluminum Company (IRALCO). The European Union sanctioned the firm in December 2012 because it assisted "designated entities to violate the provisions of UN and EU sanctions on Iran and is directly supporting Iran's proliferation sensitive nuclear activities." Because IRALCO was sanctioned for nuclear-related activities alone, the EU will soon delist it. The U.S. never designated IRALCO, and therefore has no secondary sanctions against the firm. Yet, according to IRALCO's July 2015 report, the IRGC-owned (and U.S.-sanctioned) Mehr Eghtesad Iranian Investment owns 20 percent of the company. If foreign investors were to buy into IRALCO through the TSE, they might soon find themselves sitting on a company's board alongside U.S.-sanctioned IRGC executives.
The Obama administration is adamant that its sanctions against the IRGC remain in place and that the nuclear deal will not prevent strengthening non-nuclear sanctions against the Guard's role in terrorism and propping the Syrian regime if necessary. What better way than to test this proposition than for Congress to punish those investors who partner with the IRGC?
Ottolenghi is a senior fellow at Foundation for Defense of Democracies, where Saeed Ghasseminejad is an associate fellow.