Iran: a pot of gold in the Middle East

If Iran’s sanctions are lifted under the new nuclear deal, a huge opportunity awaits Lebanon

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Iran is the hottest emerging market in waiting. It possesses the most expansive industrial base within the region, including one of the biggest auto-manufacturing industries. And despite crippling sanctions, it has managed to place itself on the map among the world’s leading countries in cutting-edge sciences with advances in nanotechnology and stem cell research. Its energy projects are worth over $160 billion according to MEED, the business and intelligence consultancy. It’s a goldmine waiting to be explored.

A sanction-free Iran

Over the past year, there has been a lot of noise surrounding the Iran deal. The sanctions are set to be lifted by early next spring, and Iran will be free to take its place in the international community as a leading country in science, technology and medicine. The sanctions sought to isolate Iran economically, and weaken its trade with other countries, devastating Iran’s financial and oil sector. In other words, the sanctions found Iran’s Achilles’ heel and brought the country to its knees.

These sanctions were allegedly meant to stop Iran from building a nuclear bomb. The sanctions also targeted Iran’s financial and banking systems, seeking to isolate the latter from the international community. They curtailed the oil revenues which account for half of the government’s revenue, placed an embargo prohibiting American firms from trading with Iran, and froze assets as well as sanctioning any individual assisting Iran in weapons development. The UN sanctions included an embargo on materials and technology used in uranium production. The European Union also froze assets of individuals and entities that worked with Iran’s nuclear program, blocked transactions with Iranian banks, and restricted trade.

[pullquote]The sanctions found iran’s achilles’ heel and brought the country to its knees[/pullquote]

To ensure that the deal goes forward, Iran has to abide by some agreements. It has to limit uranium enrichment activities, including research and development, for eight years. It has to meet international standards for nuclear fuel produced, keep its stockpile under 300kg and sell excess quantities in return for natural uranium.

Significantly, lifting sanctions would enable the Iranian economy to run more efficiently by increasing productivity. It could also gain access to cheaper and easier intermediate goods and technology. On a global scale, its entrance could lead to lower oil prices, according to the World Bank which estimates a decrease of 14 percent by 2016 if sanctions are lifted.

The Iranian economy has been suffering from a recession for over two years. Though inflation has been muted due to tightening monetary policies, macroeconomic policies change frequently and are hard to predict, destabilizing the private sector. Consequently, growth has remained below potential, leading to high unemployment rates. Additionally, the sanctions caused the labor market to worsen; 200,000 jobs have been created each year, not nearly enough to satisfy the 800,000 to 900,000 people entering the workforce annually, according to the World Bank MENA Quarterly Economic Brief. As a result of unemployment, the younger generations are choosing to stay in school and obtain higher degrees, rendering them overqualified for most jobs Iran currently has to offer. Thus they are eager to attract new foreign investment. The Word Bank estimates that the government needs to create at least 5 million jobs a year to keep the unemployment rate at 10 percent.

How Lebanon stands to gain 

If the sanctions are lifted, the economy is expected to expand in 2016 when oil production, oil exports, auto production and expansion of trade increase, giving the economy a boost. This will present Iran with opportunities to take on investment projects and grow as a market. This economic windfall could produce sustained economic growth and employment, but that depends critically on the policies adopted by the government and its institutions.

Meanwhile, Iran’s stock market stands at $96.6 billion. The Tehran Stock Exchange rose 130 percent in 2013, and another 33 percent last November. With a sizeable market comes outsized risk. Some brokers manipulate prices and sell shares to favoured clients. Some companies provide false information, allowing them to buy and sell shares at their ideal price, while others have created subsidiaries to buy and sell their own stock in order to control stock prices. There are, however, a few analysts providing research and facts to inform buyers and shareholders. There have been some efforts to improve the situation, such as by revising the rules. But without an equivalent to the National Association of Securities Dealers (NASD), there is no one to enforce security laws, and regulate trading, which could open the door to a financial crisis.

As negotiations are proceeding, Lebanon is trying to enter this emerging market. A representative from the Ministry of Economy and Trade, Rafif Berro said, “We’re not initiating relations with Iran. It was frozen due to the sanctions, so now we’re giving it more heat. We want to continue what we started.” This gives Lebanon an advantage compared to other countries. The ministry is going to be relaunching negotiations in order to specify the preferential trade agreements and what kind of products they will include. There are already some sets of agreements that need reactivating and revising in the economic, agricultural and industry sectors. The ministry is also seeking joint ventures. Iran has industries that are highly developed and high tech, and Lebanon will be able to benefit from them.

The trade Lebanon conducts with Iran at present is not great in volume due to the sanctions, making it impossible to find a mode of payment that doesn’t breach international regulations. Three years ago, according to Rafif Berro, they tried to implement a mechanism that would allow Lebanon to export its fruits and vegetables, but this was unsuccessful.

[pullquote]Lebanon exports just $3 million worth of goods to Iran and imports $50 million. It’s up to Iran to change[/pullquote]

Mohammad Choucair, the Chairman of the Chamber of Commerce, Industry and Agriculture, had a different explanation to account for the low volume of exports. He said that 90 percent of Lebanese goods cannot enter the Iranian market because Iran had put in place regulations and restrictions that limit trade, not because of sanctions. Lebanese goods are certified, which means they can be exported to other countries. Therefore it’s Iran that needs to change its regulations to increase imports from Lebanon. He says that “Iran’s market is important to Lebanon, it’s a strong one and we are in need of new markets, but if trade agreements aren’t amended, this is just talk. Lebanon exports just $3 million worth of goods to Iran and imports $50 million. It’s up to Iran to change.”

It would be in Iran’s best interest to import some products such as fruits and vegetables from Lebanon, since the cost is lower, the distance shorter, and the quality of these products meets Iranian tastes. Removing sanctions might cause real exchange-rate appreciation. This means that exports would become expensive and imports cheaper for Iran. This might push them to import Lebanese agricultural products.

According to Berro, Iran is a market that could change the balance of the global economy. If Iran keeps its end of the deal and sanctions are lifted, Lebanon will gain access to the hottest emerging market in the world. Iran and Lebanon already share good relations, but now they need them to grow.