Investments in Iran: No Need for Haste

21.08.2015

The process of lifting EU sanctions (putting American sanctions on hold) on Iran may start only in 2016. Serious investors, however, will not be in a rush, at least until the summer of 2017, when a new American administration will be formed.

A little over a month ago in Vienna, representatives of Iran and the Group of Six (international mediators of the Iranian nuclear program) reached a consensus on the Joint Comprehensive Plan of Action. In spring 2015, when such outcomes were highly anticipated, Iran was visited by a great deal of foreign delegations, though they entailed no significant inflow of investments in the country. The main reason was that the mechanism of lifting unilateral and international sanctions on Tehran was reversible. Unlike Barack Obama, the next US president will have no obligations to Iran, therefore will not be obligated to repeatedly lift financial and economic sanctions on Tehran. Moreover, although the current agreement comes into force in late October, the US administration will begin the process of lifting anti-Iranian sanctions only 8 years after.

It should be borne in mind that Iran is under the pressure of 4 sanctions resolutions of the UN Security Council, 18 US presidential decrees, 4 EU documents and 10 legislative acts enacted by the US Congress. Half of American sanctions gradually imposed on Tehran since 1979, for example, in retaliation to supporting international terrorism or violating human rights, are not related to the Iranian nuclear program and will stay intact.

The process of lifting EU sanctions (putting American sanctions on hold) on Iran may start only in 2016. Serious investors, however, will not be in a rush, at least until the summer of 2017, when a new American administration will be formed.

It is important to understand that Iran has 40 million barrels of crude oil reserves at its disposal in tankers and reservoirs. They will hit the world market as soon as the oil sanctions are lifted. But Iran cannot step up exports swiftly. Moreover, its oil sector needs $80-100 billion of investments, which no one will offer Tehran in the coming years.

The situation in the gas sector is no better. It needs a generous amount of investments, but paying them back will be a complicated endeavor, considering the rapid growth of domestic consumption of natural gas, lack of cross-country gas pipelines, save for the operating gas pipeline connected to Iraq and a smaller one to Turkey, not to mention the exceptionally limited production of liquefied natural gas.

The consumer goods market is conditioned by the living standards of the local population. So far, it is obviously insufficient for mass exports of foreign commodities. The country's government will take stern regulation measures for such exports to prevent national manufacturers from going bankrupt. Additionally, the national law will need dramatic adjustments to attract foreign investments, a step the country's parliament is reluctant to take. Religious and national factors of the Islamic Republic of Iran may become another hindrance for an inflow of investments.

Taking the above mentioned into account, major investments in the Islamic Republic are unfavourable in light of the serious financial risks. The situation would most likely stay the way it is in the next three years, lagging the economic development of the country. A lot will later depend on the state of American-Saudi and American-Israeli relations. If Washington keeps relying on Riyadh and Tel Aviv, the chances for groundbreaking lifting of American sanctions on Tehran will be low.

Of course, many in the EU are interested in developing financial and economic ties with Iran. But Europe is too politically weak-willed, so it would not go for strengthening relations with Tehran in defiance of America's interests. The latter prefers to retain the means of putting pressure on Iran rather than settling the Iranian nuclear crisis.

Russia is, on the contrary, interested in settling the Iranian nuclear crisis. That is why it fully backed the Joint Comprehensive Plan of Action by, for example, offering its territory to store Iran's surplus low-enriched uranium in the form of hexafluoride and offering assistance in repurposing the underground uranium-enrichment facility in Fordow. Russia fears neither factitious competition in the oil and gas industry nor emergence of large Western companies in Iran. On the other hand, Moscow does not rule out potential failure of the said agreement. In that case, Russia will continue building energy reactors in the Islamic Republic, cooperating in the energy sector, agriculture and transportation, and will send the S-300 anti-missile systems to the country. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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