Iran Strives to Sustain Economic Recovery

Heading for the Iranian presidential election in May, Iranian President Hassan Rouhani has much to feel good about.

Thanks to his tireless efforts, Iran’s economy has moved from a recession in 2015-16 to a 7.4% GDP growth in the first half of 2016-17, reads an article published in the economic weblog EconoMonitor run by Roubini Global Economics, a global economic and financial analysis firm based in London. Excerpts follow: 

The UN economic sanctions, in response to the Iranian nuclear program, targeted everything from shipping and banking to foreign investment and exports.

The sanctions also limited Iranian revenues and stymied industry. Over $100 billion in financial assets were blocked. The volume of oil exports fell over 50%. Car production fell by 40%.

One out of every five Iranians was jobless. The economy was 15 to 20% smaller than it would have been without the sanctions.

But lifting sanctions is not enough for Iran to be competitive in the global economy. If Iran is to escape the trap of poor management and inefficiency, Iran must ensure that privatization creates a real private sector rather than a semi-governmental sector. It can take months to get a new company registered due to bureaucratic inefficiency. The Iranian economy suffers from price controls, import tariffs and other interventions.

That said, hope is on the way. After a decade of economic despair and three years of tortuous negotiations, Tehran at last is coming in from the cold. On July 14, 2015, Iran made a deal with the UN Security Council’s five permanent members plus Germany to unwind its nuclear program in return for lifting international economic sanctions.

But it would take six months before the nuclear deal would finally go into effect. Finally, on January 14, 2016, the UN nuclear watchdog announced that Iran had fulfilled all of its commitments under the July nuclear agreement to scale back its nuclear program.

The UN inspectors verified that Iran has carried out all measures required under the agreement. As a result, UN sanctions on Iran were lifted, as were most European restrictions, including an embargo on oil imports.

Lifting sanctions allows crucial Iranian sectors such as oil and finance to reenter the global economy. Iran will also get access to funds frozen in international banks. These came after it substantially reduced the scope of its nuclear program.

 Huge Potential

At first glance, foreign businessmen saw the nuclear deal paving the way for a flood of new business deals, opening up foreign investment and international trade in crucial sectors such as oil and gas, car production, aviation, tourism, technology, mining, stock market and banking.

Iran’s potential emergence from economic isolation could be the most significant opening of an economy since the fall of the Soviet Union and the US rapprochement with China. The potential of Iran is huge.

As one of the last markets to open up to the world, its allure is unmistakable. Its nearly 80 million population—60% of whom are under 30 years old—is tech-savvy. Internet penetration is 53% across the population and 77% in Tehran. About 11 million Iranians have mobile Internet access.

Iran’s market for technology products and services is roughly $4 billion a year.

  FDI Soars

It didn’t take long for the post-sanctions economic potential to materialize.

By April 2016, Iranian oilfields were doubling their production. Iran pumped almost 3.6 million barrels of oil, a level last reached in November 2011 before sanctions over Tehran’s nuclear program were tightened. Crude oil exports surged to 2 million bpd, just 200,000 bpd below late 2011 levels.

In addition, the removal of UN sanctions reopened the county’s economy to a stream of new investments. Before the lifting of sanctions, Iran was ranked 12th out of the 14 Middle East nations for foreign direct investment between January 2003 and December 2015, equating to a market share of 1.62%.

Since sanctions were lifted in 2016, Iran has climbed to number 3 in the rankings, with a market share of 11.11%, placed only behind regional powerhouses the UAE and Saudi Arabia.

Iran won 22 FDI projects during the first quarter of 2016, the highest rate of investment since FDI Markets began recording data in 2003.

Since the sanctions were lifted, the leading sector for investment into Iran has been financial services. The country has also attracted investments from the automotive sector, business services, consumer electronics and textiles, among others.

The principal countries investing in Iran during the period were South Korea and Germany, which invested $2.15 billion.

  Impressive Recovery

In retrospect, Iran’s economy enjoyed an “impressive recovery” after the sanctions were lifted. Concerns over the durability of the nuclear agreement were triggered by Donald Trump’s repeated criticism of the nuclear deal.

The Trump administration has also warned Tehran that it is “on notice” and imposed new sanctions on Iranian individuals and entities because of Iran’s ballistic missile program and its role in regional conflicts. That said, western diplomats in Tehran and Iranian businessmen believe the deal is not about to unravel as it enjoys strong support from its other signatories, including the UK, France, Germany, Russia and China.

There was also concern that international energy groups might somehow be deterred by renewed uncertainty over US President Donald Trump’s election and his bellicose rhetoric toward Iran during his campaign. But that did not turn out to be the case.

In fact, on December 7, 2017, Royal Dutch Shell signed a provisional memo of understanding with Iran to explore potential investment in three of the country’s biggest oil and gas fields.

Shell will carry out studies on the giant oilfields of Azadegan and Yadavaran in southwest Iran as well as the Kish gas fields in the Persian Gulf. This marked the first public commitment by a large western oil company to work with Iran since the start of Trump’s presidency.

Few western oil firms can ignore the multibillion oil and gas “candy store” that is Iran. There are lots of reasons why Iran is a golden opportunity for oil and gas companies.

Iran is preparing to open a multibillion shop window for 50 oil and gas projects that are now up for grabs. It has the world’s fourth largest crude oil and second largest natural gas reserves, or more than 250 billion barrels of oil equivalent in reserves. Its energy resources have been mapped and production costs are low. Production costs are just $10 to $15 a barrel.

This ambitious oil production goal will hinge on foreign direct investment that will depend not only on sanctions relief but the terms under which western companies will be permitted to invest.