Economic Outreach to Southeast Asia

President Hassan Rouhani’s three-nation trip to Southeast Asia in October, which began in Vietnam and was followed by stops in Malaysia and Thailand, culminated in his address to the second Asia Cooperation Dialogue Summit in Bangkok. The purpose of his visit to the region was to stimulate trade and investment — part of the diplomatic activity marking the end of Iran’s international isolation and reviving economic growth.

Interaction between Iran and Southeast Asia is not new. Iranian traders have been present in the region for centuries. In recent years, Asia has become home to a diverse Iranian diaspora community. More than 100,000 live and work in Malaysia alone. But Iran’s current outreach to this part of the world is focused on the future, and primarily business. This is not surprising, given that the Association of Southeast Asian Nations is a major economic player in Asia and a key driver of global growth.

By 2030, the gross domestic product of the so-called ASEAN “tigers” — Malaysia, Indonesia, the Philippines and Thailand — is expected to exceed $1 trillion. Vietnam too is on a rapid growth trajectory, as are the frontier markets of Cambodia and Laos. With the launching of the ASEAN Economic Community in November 2015, the ten-member bloc is on track to become a fully integrated market. These bright prospects form the backbone of Iran’s efforts to reestablish and expand economic ties with ASEAN countries, which had been pushed on the periphery due to the  international sanctions.

The Washington-based think tank Middle East Institute in an essay provides a brief overview of Iran’s relations with Southeast Asian nations during the sanctions period, looks at the initial results of President Rouhani’s recent visit to the region, and considers the prospects for the further expansion of these ties.

  Under Sanctions

Iran’s engagement of ASEAN countries began in earnest in the latter 1990s as part of its Look East policy, which was adopted largely in response to increasing isolation from western markets. Iran’s development of trade and investment ties with Southeast Asian nations progressed, albeit relatively slowly and unevenly — gaining traction in the mid-2000s and centered on the energy sector.

Between 2004 and 2009, Iran signed a number of promising oil and gas development deals with Southeast Asian partners.

However, the very circumstances that caused Iran to pursue these ventures — increasing US sanctions pressure on foreign firms to halt investment in Iran — resulted either in the suspension or cancellation of contracts, or in the slowdown of project implementation.

  Post-Sanctions Reengagement

The primary purpose of Rouhani’s trip was to boost trade and investment, and by doing so to help jump-start the country’s sputtering economy.

The visits yielded a number of ambitious pledges. Iranian and Vietnamese officials agreed to increase the volume of bilateral trade to $2 billion within five years. Rouhani’s meetings in Kuala Lumpur resulted in the stated goal of restoring the volume of Iran-Malaysia trade to the pre-sanctions level and then doubling it. Yet, it is important to note that Iran’s merchandise trade with ASEAN countries is starting from a very low base as Iran is ASEAN’s 53rd-largest trade partner.

During all three stops on his itinerary, Rouhani and his counterparts vowed to do their utmost to collaborate across a wide spectrum of economic sectors: with Vietnam — fisheries and aviation; with Malaysia — Islamic banking, the halal food industry, and academic and technological fields; with Thailand — automotive and manufacturing industries, as well as agriculture; and with all three — tourism development.

But the primary, and more immediate focus of the Rouhani visit — and of the various interactions between Iranian officials and their ASEAN counterparts both before and since the trip — has been on reviving and expanding energy cooperation. Here, two Iranian priorities stand out: 1) successful re-entry into the global oil market and 2) attraction of foreign investment for the country’s oil/gas infrastructure and field development.

Interestingly, it is with Indonesia and Singapore — two ASEAN countries not on President Rouhani’s October itinerary — that Iran has made the most progress in energy cooperation since the signing and implementation of the Joint Comprehensive Plan of Action that lifted the nuclear-related sanctions.

Indonesia, ASEAN’s largest economy, which became a net oil importer in 2004, now depends on importing foreign oil to meet growing domestic demand. In addition, its national refinement capacity is over-stretched. The country is also on pace to become Southeast Asia’s largest consumer of gas by 2025. It is in this context that Iran-Indonesia energy cooperation has gained some traction.

With an eye toward securing foreign investment, Iranian officials have identified a wide range of economic sectors as areas of potential collaboration with Singapore. Within just a few weeks of implementation of the JCPOA, Singaporean Minister of Trade and Industry S. Iswaran and Singapore Business Federation Chairman Teo Siong Seng led a 67-member delegation to Iran aimed at reestablishing the bilateral trade and investment relationship. The mission culminated in the signing of a Bilateral Investment Treaty.

  Receptive Audience

Southeast Asian countries have welcomed Iran’s reintegration into the family of nations, as illustrated by their endorsement in July of Iran’s accession to the ASEAN Treaty of Amity and Cooperation. Similarly, the message that Iran has reopened for business has found a receptive audience across the region.

In seeking to revive and expand economic relations with ASEAN countries during his recent three-country tour of the region, President Rouhani touted his country’s distinctive assets and potential.

Yet, Rouhani and his entourage did more than simply highlight Iran’s competitive advantages during their brief visit to the region. They made clear that Iran is looking to capitalize on ASEAN countries’ success and bright prospects to help meet its own urgent needs — with no need being greater than that of foreign investment, particularly in the energy sector. They also made clear that Iran is seeking to develop comprehensive economic partnerships with ASEAN countries — away from the simple oil-for-goods model.

Whether this charm offensive bears fruit will depend, among other things, on Iran’s ability to overcome payments and other banking system obstacles, as well as residual US sanctions and restrictions on dollar transactions, and to create an enabling environment for business through instituting legal and regulatory reforms.