Iran's new, post-sanctions economy

By Ahmed Amin & Andrew Jay Rosenbaum

ANKARA

Since the imposition of economic sanctions on Iran, the country has sought to broaden its economic relations with countries in the Middle East, especially with the United Arab Emirates.

The UAE is Iran’s most important trading partner. UAE Economy Minister Sultan al-Mansouri said in June that trade volume with Iran rose to $17 billion in 2014, but remains lower than the $23 billion in 2011 before the sanctions. The UAE saw a total trade surplus of $130.8 billion in 2014.  

The vice-president of the Iranian Business Council in Dubai, Hossein Haghighi, has said he expected a surge in trade after the lifting of sanctions. Within the first year, total trade between the UAE and Iran is likely "to go up by between 15 and 20 percent," Haghighi said. 

Building trade with Asia

Iran used its oil and gas reserves to circumvent sanctions imposed by the West, and strengthened its economic relations with Asian countries, particularly with key regional economic players such as China and Turkey.

Asia ranks first for Iranian foreign trade, receiving 87 percent of Iranian exports and providing 69 percent of Iranian imports, according to the Iranian Business Council.  

Europe ranks second, receiving 11 percent of exports and providing 28 percent of imports with Iran.

But Iranian trade with the United States was flat, accounting for only 0.3 percent of exports, and 2 percent for imports.

Interestingly, Iranian trade with Africa is also weak, with the region receiving only 2 percent of exports and providing only 0.1 percent for imports. This reveals Iran’s fragile relations with Africa.

Iranian trade penetration in the Gulf countries, including Kuwait, Bahrain, and Oman, is expected to increase in the wake of the nuclear agreement.

Iran’s economy can be confidently forecast to grow sharply now that the nuclear agreement is in place.

A new map for Iranian economic relations

Experts and analysts believe that Iran will witness a huge leap in its economic relations with Western countries, as the country is expected to gain access to about $100 billion in assets that have been frozen under the sanctions.  

Moreover, the end of sanctions will allow Iran to open its gates to Western companies, permitting them to work in its internal market.

Iranian economic relations are expected to evolve as follows, according to experts and analysts:

- Iranian economic relations with Arab countries will not witness a notable change, as oil and gas comprise the largest sector of the country’s economy. The sector also accounts for the largest part of Arab countries' economies as well. But Iran is expected to diversify its economy into industries and services, becoming like countries such as Turkey.

Moreover, the UAE is forecast to lose its position as the principal trading partner for Iran, and many other countries, like Turkey, will compete with the UAE for a position in this market. But Iran will have to compete with other major players in the Middle East like China, and that competition will be challenging.

- Iran will seek to import western industrial technology from the U.S. and Europe, to which sanctions have denied it access until now.

- Iran will seek membership of the World International Trade Organization, which is dominated by the U.S. This will launch Iran in a new direction, in which new structural, legislative and economic reforms will be put in place.

- Iran will acquire new gas production technologies from Europe and Russia.  Iran possesses the largest gas reserves in the world, which could enable it to become Europe’s main supplier of gas, as it achieves a technological upgrade.

- Europe and the U.S. are the main players in the mining and manufacturing industries, and Iran will seek to develop trade with them once the sanctions are lifted.

Turkish business to profit from lift of Iran sanctions

There are great opportunities for Turkish business in Iran, now that the accord with the world powers has begun the lifting of sanctions, economists told Anadolu Agency on Tuesday.

"A vast market will now be open to both Turkish exporters and Turkish investors," forecast Renad Mansour, an Iran analyst with the Carnegie Endowment for International Peace in London.

"Trade could balloon dramatically. There will be openings in almost all sectors," agreed Hassanan Hakimian, economist and director of the London Middle East Institute at SOAS, University of London.

Although competition with business from other countries will be tough, Mansour pointed out that Turkey will have the added advantage of the Preferential Trade Agreement, signed by the Justice and Development (AK) Party government in 2014, and which went into effect in January 2015. This agreement removes or reduces tariffs on hundreds of goods and services.

With that help, and the long experience of many Turkish companies working abroad, the $13.7 billion volume of trade with Turkey in 2014 could climb to $30 billion in two years, once the sanctions are lifted, according to a report published in June by the Turkey-Iran Business Council. 

 "There are opportunities for exports in energy, food, consumer durables, electronics, household goods, automobiles, and other technologies, just to name a few” Hakimian said. “And there are chances for investment in infrastructure and major projects. The banking sector will open up as well."

Turkish business has the advantage of a border location on Iran, and this may provide opportunities for locating corporate headquarters close to Iran, or businesses may prefer to locate in Turkish major cities and to access Iran from there, Hakimian added.

To be sure, Turkish businesses may not find it easy to take market share in Iran, warned Svante Cornell, director of the Institute for Security and Development Policy in Stockholm.

"Iran is not an easy place to do business, and there is an element of xenophobia that may raise obstacles toTurkish businesses. But Turkish businesses are experienced and sturdy, and they will have a good chance," Cornell explained.

New start for a growing economy

The sanctions have kept Iran, up until now, from performing at the same levels as other emerging markets, the World Bank points out in a note on Iran on its website.

Iran has a population of 81,824,270, about the same as Turkey, and more than any of the emerging economies of Eastern Europe. Thanks to its oil, Iranian gross domestic product is already substantial. At $437 billion, it is the 27th largest economy in the world, roughly similar to Argentina and Taiwan, and ahead of Austria or Thailand.

Of course, the sanctions won’t be lifted for some time. American and European sanctions will be lifted progressively, in phase with the International AtomicEnergy Association verifications that the steps required in the accord on nuclear energy are being taken. Experts vary in estimates for how long it will take to lift the sanctions – the IAEA predicts six months, but other analysts say it may take up to a year and a half.

When they are finally lifted, Iran's already growing economy will grow a lot faster.

In 2014, a temporary easing of sanctions caused the Iranian economy to rebound out of recession, the World Bank report said. Growth was estimated at 3 percent in 2014 compared with a contraction of 1.7 percent in 2013.

And the Iranian economy has a lot of positive structural factors, Mansour pointed out. About 65 percent of the population is under 35 years old, and literacy among 15- to 24-year-olds is 98 percent. Total adult literacy is 85 percent. About half of all Iranian households reportedly have internet access.

Further, nearly 80 percent of Iranian youth – male and female – attend secondary schools, according to UNICEF statistics.

What’s more, Mansour continued, the long period of slow development under sanctions has left infrastructure and services in relatively poor shape.

Developing Energy

Turkish businesses will be well-placed to fill these gaps, Hakimian said, starting with the energy sector.

According to the International Monetary Fund, Iranian oil revenue was less than half of its 2011-2012 levels even before oil prices dropped by 50 percent in 2015. The country currently produces 3.4 million barrels per day, according to the U.S. Energy Information Administration.

An official of that company said on Wednesday that Iran's oil production can reach its pre-sanctions level of 4 million barrels per day within six to twelve months if there is enough demand, he said.

But analyst say that, to reach that goal, Iranian oil infrastructure has to be ramped up, and that will requires several billion dollars' worth of investment.

Turkey might be in a good position to make that kind of investment, as the country already has a deal in place for Iranian natural gas. Turkey already buys about 7 billion cubic meters of gas from Iran, which has the second-largest reserves of gas in the world, each year, although there have been issues about the price. Iran also seeks to join the Trans-Anatolian Natural Gas Pipeline (TANAP) project, expected to complete in 2018, which, in the future, may be able to carry Iranian gas to Europe. There is already a partnership between Iran and Turkey for energy, and increasing the scope of that partnership would provide considerable commercial opportunities for Turkey, and would improve stability in the region, according to a report by the Near East South Asia Center for Strategic Studies published in January.

Infrastructure, growing consumer product and technology sectors

"Apart from energy projects, there is an infrastructure gap in Iran that needs to be filled, and Turkey is a leader in the Middle East in these projects," Hakimian pointed out.

Then, Iranian consumers are well-educated and knowledgeable, Mansour said. "They will be eager to take advantage of the greater selection of consumers goods that Turkish exporters can provide."

A good example is Iran’s dairy market, worth  $2.1 billion in 2010, which  is projected to grow to as much as $18 billion by 2020, according to Euromonitor statistics. Then there is Iran’s market for tobacco: Iranians smoking are worth $2.6 billion, according to British-American Tobacco.

The production of automobiles is particularly important in Iran. Even under sanctions, Iran was the 18th largest producer of cars in the world. The industry provides great chances for Turkey’s auto component industry, itself one of the most developed in the world, Hakimian said.

As for technology, Iranians have had little access to the latest computers and software since sanctions were imposed. Some computers have been smuggled into the country in defiance of sanctions, but that activity accounted for only a fraction of demand. "Turkish IT producers have the advantage of easily creating channels of communication with Iranian distributors," Mansour said.

Banking is yet another underdeveloped area in Iran, due to the sanctions. Turkey’s Halkbank has  been active in the country for some time, but other Turkish banks will be able to move in, offering the latest in banking technology and services, ahead of the competition, Mansour said.

Many international companies will be hesitant to invest in Iran, due to the country’s tarnished image, after years of conflict with the West over its nuclear program, Hakimian said. "But Turkey has maintained ties with Iran throughout the years of Iran’s isolation, and now Turkish companies won’t be afraid of risk in investing in the country. That fear of risk could deter companies from other countries."

Companies around the world will have to wait for their chances in Iran, as sanctions are gradually removed. But Turkish companies, it is clear, will have a head start once the way is clear.

However, Europe and the U.S. will not just invest heavily in infrastructure and industry in Iran. Iran will also become a large market for consumer goods from Europe and the U.S., since Iran has a large population of more than 81 million.