Economy, Business And Markets

Non-Oil Trade to Benefit Most From Sanctions Relief

Non-Oil Trade to Benefit Most  From Sanctions ReliefNon-Oil Trade to Benefit Most  From Sanctions Relief

Sanctions relief is closer than ever and not surprisingly, Iranians are eagerly waiting for the economic climate to change for the better.

Pundits, however, take a pragmatic approach and believe changes will occur at a slow pace in most sectors, excluding non-oil trade that will benefit the most from the removal of economic barriers.

Iran and the world powers are at full-throttle to fulfill obligations highlighted in the Joint Comprehensive Plan of Action, the official name of the historic nuclear deal Iran and the world powers reached in July which stipulates the lifting of sanctions against curbs on Iran’s nuclear program.

All eyes are on President Hassan Rouhani’s government to make the best of the situation.

The realization of pre-sanctions oil revenues and getting access to billions of dollars of frozen assets would be the first outcome of the sanctions relief, wrote the Persian weekly Tejarat-e Farda.

A sharp fall in Iran’s oil revenues was one of the tangible results of the UN Security Council’s 2012 sanctions that walled off Iran’s banking system from the global money transfer system SWIFT.

Nonetheless, many believe it would take a long time for Iran to regain its pre-sanctions markets. Even so, the rise in crude exports is unlikely to boost government’s oil revenues remarkably, as the global crude prices have fallen by almost 60% since June last year because production from the Middle East, Russia and North America has consistently exceeded global demand.

On Iran’s non-oil trade, however, removal of sanctions will have immediate positive effects.

“The removal of sanctions will lead to normalization of Iran’s international trade ties, lower commercial costs and boost exports by providing access to new markets,” Masoud Karbasian, the head of Islamic Republic of Iran Customs Administration, said.

“Also, as a result of the lifting of sanctions, the government could start negotiations with other countries to reach agreements over tariff discounts on Iran’s exports,” he said.

Reconnection of Iran’s banking system to SWIFT is one of the first benefits of sanctions removal for Iran’s non-oil trade, as it will allow banks to open lines of credit for Iranian importers.

Opening LOCs will help lower prices of imported commodities and reduce the risks of trade for Iranian businessmen. It will also lower trade costs, including customs duties, transportation costs and exchange fees.

This is while import costs have been on an upward trend as of 2008. Table 1, including the import cost of each 20-foot container during 2005-14, shows that import fees topped $2,000 for each container in 2012. In that year, a wide range of financial and commercial sanctions, imposed by the European Union in 2010, were fully implemented.

Removal of sanctions will not only lower the costs by relinking Iran’s banks with the world banking system, it will also reduce transportation costs to a large extent.

“Another benefit of the lifting of sanctions is that traders will be able to directly ship their products to Iran,” said Karbasian.

“Due to sanctions, many traders have had to ship their products to a third country where the products were unloaded and loaded again. The reexport process increased transportation costs.”

Many international ports are currently reluctant to allow access to the vessels owned by the Islamic Republic of Iran Shipping Lines, as the vessels lack insurance coverage due to restrictions imposed by the sanctions. A potential relaxation of restrictions would enable Iran to utilize its transportation capacity to a greater extent, thereby reducing transportation and import/export costs.

Just like imports, export fees have also been pushed up due to sanctions. Outbound shipment costs are currently 25-40% higher than those before sanctions were imposed.

As shown in Table 2, which indicates the export cost for each 20-foot container during 2005-14, costs peaked at $1470 per container during 2012-13. In 2012, Iran ranked 151st globally in terms of transportation costs.

Reduced shipment costs, along with removal of many other export barriers driven by the sanctions, would help boost Iran’s non-oil trade—an objective highlighted in the country’s sixth five-year development plan (2016-21).

“Under the sanctions, Iran was able to export goods worth more than $50 billion annually. Foreign trade would be eased following the relaxation of restrictions and, therefore, exports are expected to grow at a faster pace,” he said.

Karbasian referred to technical and engineering services as an area that could perform well in the export sector in the absence of financial restrictions.

Also, imports of high-quality raw materials could lead to manufacture of high-quality durable products that could be added to the list of Iran’s exports. Add to this a potential boost in shipment of handicrafts and other Iranian traditional export commodities such as carpets whose trade value has declined in recent years.

“On top of all, with sanctions removal, Iran could expand its export markets and revive its pre-sanctions export destinations,” Karbasian concluded.