Lifting sanctions on Iran opens up business opportunities

Posted on Posted in Business Guidelines

Economic sanctions have cost Iran an estimated $120 billion (€105 billion) since 2012, primarily in lost oil and gas revenues. That equates to about 30 per cent of the economy of the second-largest country in the Middle East after Saudi Arabia.

To put this in perspective, Ireland’s seven-year-long austerity drive removed about €30 billion from the economy, roughly 16 per cent of gross domestic product (GDP).

Iran has been under the thumb of sanctions for more than three decades: they have been in place, in one form or another, since the fall of the Shah in 1979. A progressive tightening of the noose since 2010, however, sent the economy into near freefall.

The collapse in trade saw GDP shrink by nearly 7 per cent in 2012. At the same time, isolation from the international banking system saw Iran’s currency – the rial – lose about two-thirds of its value, while inflation skyrocketed to 40 per cent.

The economic turmoil sent many businesses to the wall, contributing to an unemployment rate of 20 per cent, although the government disputes this figure.

While these metrics have improved since the election of president Hassan Rouhani in 2013, Iran’s economy is at least 15-20 per cent smaller than it might have been. Average income per capita is currently $5,000 compared to $54,000 in Ireland.

The lifting of nuclear-related sanctions in January – the outcome of more than two years of hard-fought diplomacy – is being billed as a panacea to its economic woes.

“The shackles of sanctions have been removed and it’s time to thrive,” Rouhani tweeted on the day they were removed.

Rapprochement with the West has, however, collided with a global slump in oil prices, limiting the potential windfall from its chief export.

The rush by European firms to do business in Iran has also been frustrated by European banks, many of which retain restrictions on financial transactions originating in Iran.

While international sanctions over the country’s nuclear ambitions have been lifted, US sanctions relating to Tehran’s alleged sponsorship of terrorism and its development of advanced missile technology remain. As a result, banks fear they may still fall foul of the US by facilitating Iranian money leaving the country – necessary to trigger international contracts.

But as the economy starts to open following the partial lifting of sanctions and the Department of Agriculture, Bord Bia and 17 Irish food companies took part in a trade mission to Tehran last week, Bank of Ireland and AIB stuck to their guns in refusing to handle Iranian money.

Meanwhile, inside Iran, conservative forces, suspicious of where trade with the West will lead, still pose a threat to the new period of glasnost. In March, supreme leader Ayatollah Ali Khamenei criticised Rouhani’s economic policies.

So-called principlists, who uphold the principles of the Islamic revolution, want Iran to develop a “resistance economy”, relying on its own resources and minimising foreign investment, partly to stop the spread of “decadent” Western values.

Perhaps the biggest challenge for Iran and potential foreign investors, however, is the country’s crumbling infrastructure. Iran needs a complete makeover to drag itself into the 21st century – new airports, factories, transport systems, oil refineries, ships, aircraft and medical equipment.

But even with these caveats, Iran has great potential as a high-growth marketplace. Its $400 billion economy is second in the Middle East behind rival Saudi Arabia. With a population of 80 million – double that of Canada – a burgeoning middle class and an extensive education system, the demand metrics are strong.

As a result, western countries – wary of potential slowdowns in other emerging economies – have been queuing up for a slice of the action. Tehran has hosted 16 trade missions, including the one from Ireland, since January and has already signed major trade deals with France, Italy and South Africa.

The country has the fourth-largest proven crude oil reserves in the world, estimated at 157.8 billion barrels – enough to supply China for 40 years. It sells around one million barrels a day, down from 2.3 million before sanctions were imposed in 2011.

The International Energy Agency recently highlighted Iran’s full return to the market as crucial, noting: “Post-sanctions Iran is, in fact, likely to emerge as Opec’s only source of significant growth in 2016.”

Bijan Namdar Zanganeh, Iran’s oil minister, signalled recently that production could rise by one million barrels a day over the next six months. Already the first tankers have begun arriving in Europe, which is looking to loosen its reliance on Russia for oil and gas following the Ukraine debacle.

Iran, however, is not as dependent on oil as some of its neighbours. The commodity accounts for about 15 per cent of exports.

Sanctions have forced the country to diversify its economy. It has a large manufacturing base, IT sector and agri-industry, making it more balanced than many others in the region, including Saudi Arabia, which has recently announced an ambitious plan to reduce its dependence on oil by 2020.

A Boston Consulting Group study placed Iran third in car market potential among developing economies, with sales of 1.5 million projected by 2020.

Iran also plans to overhaul its ageing commercial airline fleet, with the country’s aviation authority suggesting it intends to buy 500 planes over the next 10 years. Already it has placed an order for 114 new aircraft with Airbusin a deal worth up $50 billion.

US aviation giant Boeing, which lobbied for an easing of sanctions on Iran, has been afforded an exemption from the existing US trade embargo and began preliminary discussions with Iranian airlines in Tehran last month. The ending of sanctions is also expected to unlock billions of dollars in frozen Iranian assets. The overall amount is disputed, but it could be anything up to $100 billion. The government is not minded to clarify this figure for fear of whipping up too much expectation.

Better economic opportunities at home are likely to slow Iran’s brain drain, which saw more than 300,000 people leave the country between 2009 and 2013. Approximately 25 per cent of Iranians with postgraduate qualifications now live elsewhere.

One possible cloud on the horizon is the escalating rivalry with Saudi Arabia – the two countries are already fighting via proxies in Iraq, Syria, and Yemen.

While Saudi’s $80 billion defence budget dwarfs Iran’s, the likely injection of money into the Iranian economy from the lifting of sanctions may change this asymmetry, potentially intensifying the rivalry.

FAR law firm

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