Is Iran still a siren call for Western economic investment?
The Iranian economy is set for an economic boom, with global powers reinvesting in its industries. However, the US sanctions remain a great deterrent for European and Asian investors.
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Ten months have passed since ground-breaking nuclear accords were implanted in Iran, allowing the country to re-enter the world economy. However, the much-expected Iranian boom is yet to happen. Predicted to bring in at least 50 billion dollars, the lifting of the international sanctions were an alluring call to investors everywhere who wanted a piece of Iran’s 400 billion dollar economy.
Despite the billion dollar deals with companies like Airbus and Peugeot, Iran has seen little in the way of an economic boom. Originally predicted to grow six to seven percent at the beginning of the year, the World Bank has now revised those estimates and the Iranian economy is now predicted to grow more slowly in the following year from 4.2% in the spring of 2016 to 4.6% in 2017.
US sanctions are still a problem
Whilst the nuclear accords removed the United States, European Union and United Nations’ nuclear sanctions against Iran, the US has yet to remove their financial sanctions on Iran due to its ballistic missile programme and support for overseas terror networks.
Essentially, these sanctions ban Iran from the American financial system; meaning that Iran cannot do business in US dollars, the primary currency for oil sales and international trade, and stops US companies doing business with Tehran. Likewise, Iranian banks and foreign banking institutions that are processing Iran-related transactions are not allowed to deal in US dollars.
Despite the American Secretary of State John Kerry’s efforts to the contrary, this simple restriction has meant the major world banks and multinationals are wary of running afoul of U.S laws. So in spite of the billion dollar deals with Boeing or Airbus, the transactions are hard to complete because Iran cannot get finance.
Modernising the economy
To counter this, President Rouhani is rebuilding Iran’s economy: from upgrading the banking sector, to modernising the regulation and compliance sector (Iran currently has no Public-Private Partnership framework), the wheels of bureaucracy are working overtime to create an attractive investment environment.
The President has also instigated an ambitious plan to boost oil production by 20% in 5 years with an estimated 200 billion dollars in foreign investment; yet more important is his attempt to attract the foreign technical expertise that has been lacking for the past three decades in Iran.
To do this, the President and his cabinet have changed oil contracts. The Iran Petroleum Contract, as it is known, will allow foreign companies to establish joint-venture partnerships with Iranian companies in which they will manage production and reservoir development. It will allow for longer contract periods of up to 25 years or more and permit the International Oil Companies (IOC’s) to have a significant say in budget and work programs. Foreign firms will also have full cost recovery, ensuring their investments in exploring, discovering and developing new commercial fields.
This change should be welcomed by the major IOCs who previously maligned the buy-back scheme that made their companies little more than sub-contractors. However, it is not known if this opening up of the energy sector will overcome the off-putting US sanctions.
The Silk Road factor
Iran does have options other than the West: China and Russia are countries that do not rely heavily on the US dollar and both have large domestic markets that can be utilised as a stepping stone for Iran return to the international community.
China’s new Silk Road project – the One Belt, One Road Initiative – is opening up a variety of different markets to Iran, and China realises that Iran will be a vital player in this endeavour. In January, Chinese President Xi Xinping signed a 25 year cooperation agreement worth 600 billion dollars, of which $70 billion dollars is designated for Iran’s petrochemical industry by 2025.
At present, Russia is economically hampered, but it too will provide an alternate route for Iran to gain investment. However, as an energy sector competitor, Russia is unlikely to invest in a rival.
Slow and steady wins the race
Despite appearances, the Iranian economy continues to grow, but at a slower rate than the country would like. According to a Tehran Times report from June 18 2016, quoting the semi-official Mehr news agency, Iran will have received 8 billion dollars in foreign investment by March 2017. While in the four months after January’s implementation, Iran had attracted $3.41 billion in foreign investment.
Oil production has already doubled to nearly 3.9 million barrels of oil a day, which is double what Iran was producing prior to the implementation of the accords. Iran’s automotive and pharmaceutical industries were also generating significant foreign investment, and hoping to bring in 50 million dollars a year.
While these figures look promising, a problem remains in that the deals made with Iran by countries such as South Korea, Italy, France and German are long-term investments, and will not come to fruition quickly.
The risks associated with Iran’s nascent steps back into the international economy are manifold. Iran’s return to the international community, and much of this new openness in Iran, relies on the moderate government of President Rouhani. Rouhani will be facing re-election sometime next year and with little change in the economy his support base is fast disappearing. If hardliners like Ahmadinejad take control there is little doubt that Iran will follow a very different course.
The most significant risk facing investors, however, is the continuation of the United States’ sanctions. While the US has stated that it will not be prosecuting European or Asian banks that do business with Iran, many of the larger banks are doubtful of these claims. Iran needs large scale investment and it needs to have access to large lines of credit, neither of which is available presently.