For the last decade, Iraq has been afflicted by economic instability, war, and political uncertainty. Today, a new era is dawning in Iraq as the country begins to rebuild and remake itself. Much like Russia in the early 1990s, modern Iraq is in its infancy. Russia seemed off limits to savvy investors for its similarly unpredictable investment environment. Despite an occasionally bumpy transition, the RTS index has risen ten-fold since the mid 1990s.
There is good reason to believe Iraq can imitate Russia’s success. It is expected to be one of the fasted growing economies for the next several years in terms of GDP. The Iraqi Stock Exchange (ISX) remains one of the most undercapitalized in the region. Several expected IPOS on the ISX promise to increase total market capitalization as early as this year. Investors willing to bear some risk are now faced with a very similar opportunity to invest in the early stages of a resource rich country’s modernization.
A good part of Iraq’s growth story will come about through its underdeveloped oil reserves. Decades of conflict have left Iraq with as little as ten percent of its oil reserves explored. It is estimated that Iraq’s total reserves match those of Russia and Saudi Arabia though the total stock of market capitalization only 1% of these two counties. This underdevelopment offers a window of opportunity for investors to get in early and ride the wave of market capitalization once Iraq’s known oil reserves are effectively exploited. The process of putting these vast reserves to work has already begun as revenues from oil production have recently begun to rise.
Investing in Iraq is a long-term investment. Interested investors should have a 3-5 year horizon on their investment and recognize the nature of their investment. Investments will seek to benefit from Iraq’s general economic development, the growth of the ISX, and the development of its large oil reserves. Investment funds are aided by local independent managers responsible for allocating capital in Iraq and to foreign companies associated with Iraq. This allows a fund to be well diversified in order to hedge against risk and more thoroughly invest in Iraq’s economic development.
Just like the opportunity that Russia in the 1990s presented investors, Iraq has its share of risk. Funds seek to minimize risk by thorough diversification across sectors in the Iraqi economy but risk is an ever-present challenge to investors in such a market. It is a well-known general observation that risk and potential reward can be strongly correlated but investing on such sentiment is hardly sound practice. The Iraqi economy can be precarious, as Russia’s was during its development, but it has nowhere to go but up. High-risk investment in Iraq is not an instance of gambling but of recognizing the real potential the country has to develop quickly in the new post-war environment. Headlines about isolated violent incidents and political infighting can and do affect the weekly fluctuations of the ISX. Such stories cannot, however, eclipse the biggest story in post-war Iraq: development.
Off limits to American investors, Iraq can add an important element of high risk/return and long-term outlook to a Russian portfolio. Funds and investment products are available to provide investors access to Iraq’s growth. Interested investors should consult with their financial advisor about the risks and potential returns offered by Iraq.