Economy, Domestic Economy

Italy Banking on Post-Sanctions Iran

Italy Banking on Post-Sanctions IranItaly Banking on Post-Sanctions Iran

Many analysts are shedding light on the greater geopolitical implications of Iran's nuclear deal with P5+1 (the five permanent UN Security Council members plus Germany), the lifting of sanctions on the Islamic Republic and how this will impact countries that complied with the sanctions regime, yet have an interest in exploring commercial opportunities in Iran.

Italian-Iranian relations are a case in point. From Rome’s perspective, the Joint Comprehensive Plan of Action, as the deal is officially known, opened the door for many Italian firms to tap into the Iranian market. Iranian officials have long seen Italy as one of their closest partners in the West. Undoubtedly, the level of trust between Iran and Italy is higher than between Tehran and most western nations.  

Recently, Washington-based geopolitical risk consultancy GSA sat down with Cinzia Bianco, an Italian expert on Middle Eastern geopolitics, to discuss the context in which Italians and Iranians eye opportunities to pursue a mutually advantageous relationship in 2016 and beyond.

The text of the interview follows:

GSA: Iran has a relatively untapped market of 78 million people and a $400 billion economy. As European companies eye post-sanctions opportunities in Iran, what role do Italian firms see for themselves as Iran slowly reintegrates with the global economy? Who are the actors in Italy most interested in moving into Iran’s economy?

BIANCO: Indeed, Italian firms are eager to capitalize on the lifting of sanctions against Iran and fully exploit the country’s economic potential. Traditionally, Italy’s longstanding and diversified economic relationship with Iran has been centered around the petrochemical sector and related services, as well as the steel, mining, automotive and machinery sectors.

Relatively untapped promising sectors include transportation and infrastructure. Major Italian firms in these sectors have had a longstanding presence in Iran and they were more reluctant to comply with the sanctions.

At this point, they are ready to get back in business. Some of the big Italian companies include Alitalia, which had a good presence in the logistics sector; Danieli, a major global player for plant making in the steel industry; multinational corporations specializing in engineering and construction for oil and gas projects such as Snamprogetti and SAIPEM (both subsidiaries of the energy major ENI), and Tecnimont SpA, which since last March has allegedly been involved in preliminary talks regarding the realization of auxiliary infrastructures for the petrochemical complex in Asaluyeh, southern Iran and Ansaldo Energia, an integrated operator for power generation plants.

In addition to that, being rich in mineral resources such as lead, zinc, iron and copper, the mining industry and its ancillaries are also looking at Iran with tangible interest, both as an investment spot and as a source of import.

The food industry seems promising in both directions. Iran still has a sizable portion of unexploited arable land, which might be of interest to Italian investors and it is a big market for the export of Italian food. Finally, in addition to the big multinational companies, countless small- and medium sized-enterprises are examining ways to tap into Iran’s market, in particular as a market for the export of “Made in Italy” products of the most diverse categories–from the usual textile and fashion, to luxury goods, to technology, and to medicine.

Before the UN Security Council imposed economic sanctions on Iran in 2006, Italy was one of Iran’s most important trade partners. How did sanctions impact Italian-Iranian relations?

Undeniably, sanctions took a major toll on Italian-Iranian trade. However, the real hit came in 2012, when a wide range of financial and commercial sanctions, established by the EU in 2010, were fully implemented. The trade exchange between Italy and Iran had hit a peak in 2011, reaching $7.66 billion and has significantly declined since 2012. Due to the effects of international sanctions, Italian exports toward Iran registered a decline of 24.3% in 2013 and a further decline of 22.6% in 2014. Because Italy’s “triangulated exports” (mostly consumer goods) via two key Italian partners–Turkey and the UAE–had to be halted, the sanctions hit even harder.

One of the main sectors impacted was energy. Until 2011, Iran had been one of Italy’s main energy providers (Italy imported roughly 7% of Iranian crude oil production). Italy’s energy market has thus suffered significantly since the 2012 oil embargo, also given that its sources had been already compromised by the instability in North Africa, Italy’s main source of oil imports.

What can the opening of Iran do to improve Italy’s dismal economic conditions? Does Italy view Iran’s market as an opportunity to increase national exports? What does Iran see in Italy as an economic partner?

Since the 2009 financial crisis, domestic consumption in Italy has been the most stagnant of all EU members. Many view increased exports as a means to overcoming the crisis and perhaps achieve economic growth.

In addition to the usual destinations and emerging markets in China, the (P)GCC, Turkey and Eastern Europe, Iran is seen as a promised land for Italian products. The numbers look good.

According to SACE (the Italian state-owned credit rating agency), the opening up of the Iranian market could spur Italy’s export for a total of $3.28 billion within the next four years. Of course, this is a preliminary assessment.

Nonetheless, the opportunity is real, given that post-sanctions Iran will presumably seek medium- and high-range products, which absolutely include products that fit the “Made in Italy” description.

Do Italian firms’ links with the US complicate their prospects for pursuing lucrative opportunities in Iran?

Throughout the past, this has been a tricky issue, but mainly with the US government, rather than with private American firms. Tension mounted with Washington when several Italian companies, including Italy’s energy giant ENI along with other European firms, showed a certain reluctance to comply with the US-imposed sanctions.

However, if the JCAOP proves successful, there is little reason to expect Italian companies to refrain from pursuing economic opportunities unfrozen by the deal.

Across Europe, the “rush for Iran” has already begun with several European firms competing to organize business trips to Tehran.

Only the Italian companies that have structural connections with American firms would find it difficult to engage Iran’s market decisively and unilaterally. Of course, these companies would probably opt for discussing their development plans with US partners in order not to alienate them. Indeed, whatever profit Italian firms might hope to gain from Iran is hardly worth such a high price. On the other hand, US companies seeking to explore Iran may find Italian firms to be important partners for coordination purposes.

What is the likely future of Rome-Tehran relationship?

From the Iranian side, a high-level political visit has been planned to Italy. From the Italian side, there has been no political visit yet and the main activity has been a business trip, which the Ministry for Economic Development organized in partnership with other Italian institutions. The delegation was big in number and profile.

Last month, 178 companies, 20 business councils and 12 financial institutions participated in the Bilateral Economic Forum in Tehran, which ended with the signing of four memoranda of understanding in the fields of tourism and trade.

Undoubtedly, this was a remarkable initiative. However, it was less significant than what the Iranians had planned–a visit by President Rouhani to Italy and the Vatican … We will probably witness a two-speed future in the bilateral relationship–a faster pace on economic development and a slower pace on political cooperation.

Surely the potential to strengthen the bond exists. Time will tell if both sides are willing to pursue it.