Economy, Domestic Economy

Risk and Reward of Trade With New Iran

Steven CioboSteven Ciobo
Iran has unique needs, and the competition to meet them will be intense from other foreign companies and from business interests within the country

The easing of economic sanctions against Iran represents long-term trade and investment opportunities, Australia's trade, tourism and investment minister said.

"To explore these opportunities, I am leading a business delegation to Tehran this week, marking the beginning of a new economic and trade relationship with an economy that has been isolated for a decade," wrote Steven Ciobo in an article published by the newspaper The Australian on Tuesday. Below is the full text:

It is a rare event for a country such as Iran with more than 80 million people and a gross domestic product of nearly $390 billion to reintegrate with the global economy.

Given this significance, the Turnbull government (the federal executive government of Australia led by the 29th prime minister of Australia, Malcolm Turnbull) is monitoring developments closely.

Iran is the Middle East’s second largest economy, a major oil and gas producer, and has a large consumer base along with a sophisticated, highly educated workforce. It is also a gateway to important markets in Central Asia.

As multinationals such as Boeing, Airbus, Total and Peugeot-Citroen return to Tehran to seek deals, Iran is looking overseas for foreign investment and the goods and services needed to drive growth.

Navigating Iran’s complexities will be a challenge for Australian businesses, which is why the Turnbull government has reopened an Austrade office in Tehran.

For our businesses to make the most of Iran’s economic resurgence, they will need to identify new opportunities and develop effective methods to capture them, while managing the impact of remaining sanctions and other conventions.

Our businesses need to engage suitable partners and clients, seek out quality business services and understand the remaining sanctions landscape.

> Sophisticated Nation, Developing Economy

Iran is a sophisticated nation with a long history, but it is also a developing economy.

It has unique needs and the competition to meet them will be intense from other foreign companies and from business interests within the country.

The scope of the opportunities is significant and already Australian businesses are showing interest in specific sectors.

Foreign Minister Julie Bishop’s visit to Iran last year and the visit of Iran’s Foreign Minister Mohammad Javad Zarif to Australia earlier this year paved the way for enhancing the bilateral relationship: Expanding our economic relationship is an important next step.

Iran’s reengagement with the trading world is the result of the Joint Comprehensive Plan of Action, an international agreement designed to limit Iran’s nuclear program in exchange for easing sanctions.

This easing of sanctions opened the way for Iran to do business again in areas such as infrastructure development, oil and gas, shipping and transport.

However, it must be said that reform processes underway in Iran are needed to entice international business and smooth the path for growth.

> Positive Signs

Signs are positive—the Iran Petroleum Contract, once finalized, will provide better terms than the buyback contracts of the late 1990s and early 2000s; and ongoing banking reform is also key to opening Iran’s financial sector to the international economy.

Iran has one of the world’s largest reserves of gas and the fourth largest reserves of oil; indeed, before the sanctions, it was the second largest oil producer in OPEC.

The International Monetary Fund projects Iran’s real growth rate will jump to around 4% this year before easing to 3.7% next year—this compares with zero growth last year.

Meaningful economic reforms and steps to reassure foreign investors will be needed for this surge in growth to be sustainable.

These include bringing inflation under control, improving competition in the non-oil economy, fixing the banking sector and strengthening non-oil sources of tax revenue to fund higher investment in education and infrastructure.

Successful investments in oil, gas and auto sectors also will reassure foreign investors.

> Wide Range of Opportunities

For Australian businesses, the opportunities lie in food, especially wheat, barley and lamb; also in equipment, technology and services for the oil and gas sector as well as in mining; healthcare services; water management technology and services; and, importantly, education and vocational skills training.

Critical to overall growth and industry development, Iran needs assistance to better manage scarce water resources. Australia’s hard-earned expertise in managing water means our skills in this area are already in demand.

Meanwhile, Iran’s energy infrastructure requires upgrading to bring it into the high-technology space of the 21st-century oil and gas sector.

The demography of Iran is also promising for Australian exporters. About 43% of Iran’s population are under 25 years old and 73% live in urban areas.

Despite being a very well-educated nation, young Iranians also want education and training from abroad, as well as better healthcare and easier access to consumer goods.

> Building on a Solid Foundation

In this post-JCPOA (the Joint Comprehensive Plan of Action—the formal name of Iran's nuclear deal with the West) phase, the good news is that many Australian companies are in a strong position to supply the needs of an increasingly diverse Iranian economy.

Furthermore, renewed trade will be built on a solid foundation of past commercial relations developed across many years: During the 90s, for instance, Australia was a leading exporter to Iran.

And Australia has had ongoing diplomatic ties with Iran since 1968, when our embassy opened in Tehran.

The signs for Australian businesses are good but success in the market will require a keen appreciation of the nature of Iran’s economic reengagement.

There are significant risks but, like any important market, there are also potential rewards.