Iran and International Markets: Growth of Mutual Interest

The main foreign policy achievement of the Rouhani government was the improvement of relations with the West, which is important to Iran for economic and political reasons.

The January 16, 2016 statement by the IAEA Director General confirming that Iran has completed the necessary preparatory steps to start the implementation of the Joint Comprehensive Plan of Action (JCPOA), which was signed on July 14, 2015 between the P5+1 (China, France, Germany, Russia, the UK and the US), the European Union and Iran, paved the way for lifting sanctions on Iran and for allowing Iran to re-enter the global economic system as a full member. Iranian President Hassan Rouhani said in late 2015 that Iran “is now reopening its doors to the international economy in order to accelerate its economic growth aimed at implementing its public promises.”

US President Barack Obama has lifted the ban that prevented foreign companies and foreign subsidiaries of American companies from doing business in Iran, but reaffirmed the trade embargo against Iran for American companies (excluding the export of spare parts for civilian aircraft to Iran and the import of certain foodstuffs intended for human consumption and handmade articles such as floor and wall carpeting from Iran).

The EU has lifted the oil embargo, approved financial transactions with Iranian banks, and decided to unfreeze Iranian assets (worth about $50 billion) and to allow Iranian banks to reconnect to SWIFT, including Melli and Sepah banks, which had been blacklisted before 30 Iranian banks were banned from this international electronic payment system.

The lifting of sanctions will accelerate the growth of Iran’s GDP, which began in 2014 when the P5+1 powers started talks with Iran and continued in 2015 when some sanctions were eased. According to the IMF, Iran’s GDP increased by 4.3 percent in 2014 and 0.8 percent in 2015, and growth was especially rapid in the manufacturing sector. Iran’s Central Bank has reported that industrial growth amounted to 5 percent from March 2014 to March 2015 and to 6.9 percent in the manufacturing sector. Now that sanctions have been lifted, Iran expects to increase its oil production and subsequently export by 500,000 barrels a day, which implies a return to pre-sanctions figures. In this situation, the IMF believes that Iran can increase its GDP by 4.4 percent in 2016.

These optimistic forecasts are based on foreign investors’ interest in the Iranian market and on Iran’s growing desire to modernize its oil industry, develop offshore oil and gas fields, build new oil refineries, introduce modern technology at existing oil refineries, diversify the manufacturing sector, and apply new agricultural processing and storage technology. Despite the falling energy prices, Iran’s oil and gas sectors offer attractive production and export conditions. A new procedure for foreign investors in the oil and gas industry, which became effective in January 2016, offers them more rights and privileges in the production and production-sharing projects. And lastly, investors are attracted to Iranian oil projects by the low production costs.

The growth of foreign companies’ investment interest in Iran has been boosted by the Sixth Five-Year Development Plan for 2016-2021, which provides for accelerated development based on economic liberalization, including privatization with the involvement of international investors. Another objective is to facilitate the growth of knowledge-based industries and the creation of new technologies in pharmaceuticals, space exploration, the petrochemical industry and natural gas liquefaction. An additional impetus for international investors is population literacy, considerable national reserves for investment, and the ongoing fight against corruption in Iran. As of late January 2016, Iran ranked 130th in the Corruption Perceptions Index, which is rather low but better than last year. Iran’s ranking in the Ease of Doing Business Index has improved from 130th place in 2014 to 118th place in early 2016.

The main foreign policy achievement of the Rouhani government was the improvement of relations with the West, which is important to Iran for economic and political reasons. Iran is also interested in restoring and strengthening its economic ties with China, India, Japan and South Korea, which are the largest investors in Iran and the largest consumers of its crude oil.

The structure of Iran’s foreign trade in 2014 indicated its interest in developing relations with individual countries and vice versa. China accounts for about 55 percent of Iran’s foreign trade. The largest importers of Iran’s products (mostly oil) are China (about 30 percent), India (12 percent), Turkey (over 10 percent), Japan (about 7 percent) and South Korea (about 5 percent).

Iran obviously wants to re-enter the European oil and gas market, but more than that it wants to buy new European equipment and technology and to implement joint investment projects in industry. In the past few years, Iran’s imports from the EU amounted to barely 1.5 percent of total imports and exports for 5.4 percent of the total, which is still twice as large as its trade with Russia. Iran imported a large part of products from Europe and the United States via other countries, but mostly through the United Arab Emirates, which accounted for over 30 percent of Iran’s foreign trade during the sanctions period.

The mutual interest between Iran and the global market increased dramatically in late 2015 and early 2016.

During Chinese President Xi Jinping’s visit to Tehran on January 25, 2016, Iran and China signed 17 agreements, including on building two nuclear power plants in Iran and on increasing Iranian oil deliveries to China. They decided to boost bilateral trade tenfold, to $600 billion in 10 years. The Iranian president said that Xi Jinping’s visit opened a new era in bilateral economic and political relations. Iran and China hope to increase their economic ties many times over, including under China’s Silk Road Economic Belt project and in the framework of the Shanghai Cooperation Organization, in which Iran hopes to become a full member. Under its new five-year development plan, Iran will develop seaports and special economic zones on the Makran coast bordering Pakistan so as to play a major role in China’s ambitious initiative to revive the ancient Silk Road route.

Iran is interested in Russia, whose companies are also interested in Iran, as evidenced by the agreements reached at the 12th meeting of the permanent intergovernmental commission in Moscow in November 2015. In light of international sanctions against Russia, Iran has increased food deliveries to Russia, especially after 25 Iranian companies were issued food supply permits in January 2016. Russian companies are returning to Iran, too. One of Russia’s largest oil producers, LUKoil, has signed an oil field exploration and production agreement with Iranian authorities.

European companies expressed their desire to reenter the Iranian market as soon as Iran launched talks with the P5+1 group of international mediators. This interest acquired practical dimensions when the EU lifted all economic and financial sanctions from Iran in January 2016.

President Rouhani made his first foreign visit after the lifting of sanctions to Italy, where 17 agreements worth about EUR 17 billion were signed. One of the largest agreements, worth EUR 5 billion, was signed with oil services group Saipem for the construction of a pipeline in Iran. The Danieli Group, which was very active on the Iranian market before sanctions were introduced, has signed agreements worth about EUR 6 billion on a joint venture (Persian Metallics) and on the supply and installation of machinery and equipment in Iran.

Italian energy group Eni, which used to be one of the main buyers of Iranian oil, is considering the possibility of resuming its business in Iran.

Mutually beneficial agreements worth EUR 15 billion in total were signed in the presence of the two presidents in France, where Rouhani went after Italy.

Pierre Gattaz, the president of the French employer federation Medef, said French companies should “rush” to Iran and “not waste any time.” The carmaker Peugeot Citroën then signed a deal worth EUR 400 million with the Iranian carmaker Khodro, and Airbus will deliver 118 planes to Iran Air within four years.

Italian and French officials also inked agreements on cooperation in railway transportation and shipping, not to mention deals with French oil companies. The deal signed between the National Iranian Oil Company (NIOC) and France’s Total for up to 200,000 barrels of oil a day will facilitate Iran’s return to the French oil market.

During his visits to Italy and France, the Iranian leader also discussed current international issues such as the fight against terrorism, the situation in Syria, and Iran’s relations with Saudi Arabia. But it’s obvious that the nascent improvement of Iran’s cooperation with Europe can be greatly accelerated by a breakthrough in their economic relations.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.