The nuclear deal reached between the P5+1 and Iran is not only a boon to domestic and international energy firms. Sizable opportunities exist for non-oil and gas players, as well.
The recent nuclear agreement between Iran and the P5+1 has whet the appetite of energy companies looking to tap into some of the world’s largest oil and gas reserves. But if the deal is passed by the US Congress, which seems likely, Iran is set to become an appealing export and investment destination for non-oil and gas firms, too. This opening will not take place consistently, and will vary widely by industry.
For one, the staggered repeal of international sanctions against Iran will largely not apply to US companies, a vestige of the 1996 Iran-Libya Sanctions Act and Clinton-era executive orders. While the UN and EU will repeal most of their economic and financial sanctions – both those that directly target Iranian entities, as well as firms who conduct business with them – on “Implementation Day”, the US will only do so for “non-US persons”, as Annex II of the agreement indicates.
However, there are several exemptions, such as US entities which import Iranian carpets and foodstuffs, as well as those who do business with Iran’s civil nuclear authority.
In addition, subsidiaries of US-owned companies will now be able to obtain special licenses by the Department of the Treasury’s Office of Foreign Assets Control (OFAC) to enter into contracts with Iranian organizations. The deal also places US firms that export, service, or lease civilian aircraft in this category, although they already have this privilege as of last year.
Nonetheless, it is still unclear how many of these licenses will be granted and how lengthy the process will be. OFAC could choose to revert to its pre-2012 stipulations and issue general licenses fairly broadly on behalf of US subsidiaries, or it could more require cumbersome specific licenses that must be applied for and are unique to each type of transaction.
So is it as simple as good news for non-American firms and bad news for the rest: the Boeings, pistachio importers, and nuclear energy enterprises of the US excepted? Not quite.
Western investors versus the Rest
“European firms stand to benefit most because they traded with Iran robustly until 2010,” says Artin Afkhami, former Iran researcher at New York Times and Princeton University.
Many of these companies had business ties to the country that predate the 1979 Islamic Revolution, such as Siemens and Peugeot. Others only stopped doing business with Iran a few years ago as sanctions ratcheted up. These include Societe Generale, which only gave up its license and halted its Iranian operations in 2012, and Renault, which stopped exporting vehicles to Iran a year later.
Still, Afkhami notes that they will undoubtedly face competition to tap into a nation of 80 million middle-income consumers, given the trading links that Tehran developed with developing nations since 2010, such as Turkey, South Korea, Russia, and especially, China.
Beijing’s growing economic clout in Iran extends past trade: a number of its auto manufacturers have capitalized on Western sanctions by entering into joint ventures with Iranian partners, and it recently announced plans to double its investment in Iranian infrastructure projects to $52 billion.
Non-energy sectors look set to rebound
A multitude of Iranian sectors outside of oil and gas were crippled by sanctions but are now ripe for investment.
For instance, Iran already owns the world’s largest fleet of oil supertankers, but it also possesses a vibrant shipping and shipbuilding industry, which is likely in need of insurance, maintenance, supply, bunkering, and other service contracts.
Similarly, its under-capacity container berths on the Persian Gulf may once again play host to a number of Western shippers, evidenced by France’s CMA CGM choosing to call at the modern Shahid Rajaee Port in a few weeks’ time.
Further, Iran is the world’s 11th largest mineral producer, but a lack of research capacity and outdated technology are two of the country’s biggest obstacles to modernizing the sector, which boasts ample reserves of steel, copper, aluminum, and other metals.
With the right risk appetite and tolerance of a relatively untested regulatory regime, mineral extraction and processing in Iran may prove highly profitable for foreign miners, especially in light of gradual privatization.
Other non-energy areas that look set to be profitable for outside firms with the right expertise include software, petrochemicals, automobile manufacturing, insurance, and especially finance, which underpins the rest.
Banks may still be risk-averse
When it comes to international banking, from which Iran was largely cut off in recent years, European banks plainly stand to gain the most.
They were widely utilized by the Islamic Republic for payments processing and financing trade-related transactions, and most of their potential Iranian banking partners will be removed from the EU “blacklist” once the deal begins, a benefit their US counterparts cannot enjoy.
Still, concerns remain since the US Treasury looks unlikely to change its stance on the Iranian financial sector, which it labels a “primary money laundering concern.”
This is part of the reason Washington is wary of removing an assortment of non-nuclear sanctions on Iran, and may lead to banks with heavy dealings in the US dollar – some of whom have already been heavily fined for breaching US sanctions – giving pause for thought. In fact, dollar clearing transactions with Iranian entities will remain prohibited.
“Given the residual ‘snapback’ capacity of international sanctions under the Iran deal, banks, being naturally conservative, will probably be slower than most industries to get back into Iran,” notes Afkhami.
Iranian momentum to open
None of these changes will occur overnight. Indeed, the nuclear accord’s Implementation Day will only take place once a number of initial nuclear-related measures are undertaken by Iran and verified by the International Atomic Agency, and by most estimates this will take at least until early 2016.
What is clear, though, is that the rush to invest in and do business in Iran is on. A German trade delegation arrived shortly after the deal and a number of other governments are planning their own commercial visits. The lifting of sanctions has some analysts predicting annual growth rates of up to 8% over the next several years.
Its timeline may be debatable, and its scope dependent on certain political variables, but Iran’s economic reawakening is in progress and massive opportunities exist even outside the oil and gas sectors.