Iran’s economy hoped for better days, with the start of the “post-sanctions era”.
On July 2015, leaders of the international community signed a historic agreement with Iran on limiting its nuclear energy program in exchange for lifting all sanctions they had put in place to pressure Iran on the issue. The deal, named the Joint Comprehensive Plan of Action, went into effect in January 2016.
Now, seven months on, many are disappointed with the outcome. The economy is still struggling, as what was hoped to be an influx of foreign businesses did not exactly turn out that way.
The United States, one of the key signatories of the agreement, continues to deny firms that operate in Iran access to its financial system, according to The Economist.
“That spooks foreign banks, which are wary of the long arm of American law.”
Proponents of the government are leading a propaganda charge against the deal. They claim that the accord was devoid of any benefits for Iran and that it actually gave up its atomic program for nothing.
So how does the historic deal stack up? Well, it depends on the stick you measure it with. Weighed against what it set out to achieve, it is still a triumph of diplomacy.
“Criticism of the JCPOA has a political agenda rather than analytical and scientific basis,” Mousa Ghaninejad, a prominent Iranian economist, told our sister publication, Tejarat-e Farda.
Oil Exports Double
The lifting of sanctions has not met the enthusiastic initial expectations, but it has given Iran a new lease on life.
The Iranian government was barred from selling oil and could not repatriate its revenues under sanctions.
After the lifting of sanctions, Iran’s oil exports have nearly doubled since December, the last month before sanctions were lifted, according to Reuters.
Sadly, the drop in oil prices diminished revenues from the boom in petroleum exports.
Furthermore, as Mohsen Jalalpour, the head of Iran’s Chamber of Commerce, Industries, Mines and Agriculture, points out, Iranian financial institutions have reconnected to the SWIFT international interbank network. Iran’s private companies can now do business abroad.
A few European banks, including Belgium’s KBC and Germany’s DZ Bank, have started handling transactions with Iran, The Economist wrote.
Also, foreign businessmen are visiting Iran searching for potential opportunities. More immediately, overhead, transaction and transportation costs have dropped for private companies because of sanctions relief, Jalapour said in an interview.
Political Feud
The JCPOA is being criticized by some because its effects are not what was advertised and anticipated. But that has more to do with over-the-top expectations about the deal than the deal itself. The moderate government of President Hassan Rouhani exaggerated the outcome due to its feud with the political opposition, said journalist and economist, Saeed Laylaz, to Tejarat-e Farda in a separate interview. It needed political support for the deal. The tactic has now backfired.
Laylaz says this was a predictable response from the government and that the entire negotiations were politicized by the government.
“The government was not viewed as one of the three branches of power [besides the judiciary and legislative bodies]. In practice, it was viewed as a political front,” said Jalapour.
Jalalpour, Ghaninejad and Laylaz believe the negotiations and the deal were a matter of national security and should have been treated as such by other state organizations.
But the government was not the only perpetrator of over-promising the deal’s effects. The exaggeration came from overestimating Iran’s allure and capacity for foreign business and ignoring the inherent shortcomings of its economy, among many foreign and Iranian analysts.
Unresolved Disputes
First off, “the JCPOA did not solve all the disputes between Iran and the US,” said Laylaz.
Some US sanctions have survived as they were not part of the negotiations and this is the part opponents of the government leave out when firing at the JCPOA.
The remaining US sanctions on Iran have scared away large multinational banks. Less than two years after BNP Paribas SA agreed to pay a record $9 billion US fine in part for dealings with Iran, many of the continent’s biggest banks remain unwilling to go anywhere near Iran-related business for fear that they will run afoul of remaining US sanctions on the country, according to Bloomberg. This was not something analysts foresaw.
The aversion has garnered criticism from top Iranian officials. Iranian Foreign Minister Mohammad Javad Zarif said in April that international banks remain wary of US regulations and need “reassurances” that they can resume business with Iran.
Iran has been unable to tap as much as $100 billion of its assets held abroad and has gotten “almost nothing” from the nuclear accord, Valiollah Seif, governor of the Central Bank of Iran said in an interview with Bloomberg in April.
Keeping Up With Multinationals
US sanctions are not the only thing scaring foreign banks, however. Major financial players have also refrained from dealing with Iranian banks because of the laxer regulations Iranian financial institutions operate with, which are incompatible with international anti-money laundering laws and banking regulations.
Iran’s financial system fell behind advances in banking technology during the sanctions era.
“Bank regulations have changed markedly during the decade that Iran was under sanctions and we did not know that,” said Jalalpour. “We could have updated ourselves on these issues and this is the shortcoming of the government.”
Not only have banks lagged behind, the government and Iran’s private companies also lack the transparency needed for dealing with international business.
“The private sector was not ready for the post-sanctions era. Companies lacked the resources to prepare for exploiting the new business opportunities. They were also very skeptical about the deal coming through,” said Jalapour.
Furthermore, “this government has not seriously pursued the betterment of doing business during its term. Deregulation, providing security for foreign and domestic investments, and avoiding meddling in business have not been pursued. But these have nothing to do with the JCPOA,” Ghaninejad said.
Iran has a modest ranking of 118 out of 189, on the World Bank’s ease-of-doing-business index (A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm).
Cleaning up customs rules, making it easier to hire and fire workers, and easing working visa restrictions for foreigners should be the top priority. They would help, regardless of foreign business.
Ghaninejad rightly believes that the JCPOA reached its goal.
“It was the sole prerequisite for improving the country’s condition. If it had not succeeded, we might as well have been in greater misery than Venezuela. If we can easily talk, criticize and carry on with our daily lives, it’s because of JCPOA’s success,” he said.
Adding to the Flame
So, opponents are complaining about things that were outside the negotiating team’s power and scope of activity, while ignoring what is actually bogging down Iranian industry.
“Sanctions were not our primary issue,” said Laylaz. “Investment and productivity tanked for a decade and that is the real problem with Iran’s economy.”
The critics are also adding to the flame in their own way.
“When JCPOA’s opponents amplify political tensions, this itself creates a barrier against foreign investment. They must accept that they are part of the problem,” said Ghaninejad.
Pervasive corruption and the activities of quasi-state groups with big, hidden economic interests are also off-putting.
So the deal actually delivered what it set out to do. But what it has delivered so far has fallen far short of the fantasy hoped for, mostly because businesses and the government have done little to capitalize on the opportunity and the economy was in terrible shape.
The critics are jumping to conclusions and are scaring foreigners.
Last but not least, let us not forget that bridging a 10-year gap in communication and cooperation requires much more than seven months. According to Laylaz, it will take at least nine months for oil revenues to filter through to the economy.
Patience is needed though more can be done, much more.
