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Uncoiling Iran

Loosening sanctions could lead to greater growth, wealth and influence for the Islamic Republic

by Gareth Smyth

Nothing raises the entrepreneurial juices like the smell of a new market. Last month’s implementation of November’s interim Geneva nuclear deal between Iran and the world powers alerted United States and European companies to the prospect that, sooner or later, sanctions will loosen and Iran will open up.
The business potential is immense. Income that could be generated from the world’s largest gas reserves, at 33.6 trillion cubic meters or 18 percent of the global total, and the fourth largest oil reserves, at 157 billion barrels or 9.4 percent of global reserves, would make the Iranians wealthy.

Lifting sanctions would make possible the 8 percent average annual growth rate envisaged in the Five Year Plan of 2010-15. Iran is like a pent-up spring, pushed back by US and European sanctions which in two years have halved oil exports and obstructed access to both insurance and dollar markets, as well as by older sanctions that stymied the development of gas reserves. The economy contracted 5.6 percent in 2012 and 3 percent in 2013, according to the Economist Intelligence Unit.

But the spring is starting to uncoil. Since November, the clearest excitement has been among car manufacturers, specifically mentioned in the interim Geneva agreement. Peugeot and Renault have led the way, with past experience working with Iranian producers Khodro and Saipa, and envision taking Iran’s annual vehicle production back from 2013’s 385,000 to the peak of 1.6 million reached in 2011.

The agreement also included facilitating financial channels for humanitarian trade, including medicines. Pharmaceutical companies are keen to tap into a market that analysts put at $3 billion annually with 30 percent imports. Germany’s Merck is looking for local manufacturers to co-produce two of its medicines. The French Sanofil, which licenses products to an Iranian manufacturer, is planning new product launches to improve last year’s $3.7 million profit on sales of $10.2 million.

The ‘little Satan’ will not be left behind. British exports to Iran plunged 68.2 percent from 2005 to 2011, the largest fall among leading European Union countries, but during last month’s visit of parliamentarians to Tehran, Lord Lamont, chairman of the British-Iranian Chamber of Commerce and former chancellor of the exchequer, said British pharmaceutical companies and vehicle manufacturers were among those very interested in Iran.

Such companies selling in Iran, or investing in joint production, will have consequences for the country. In the longer term a return to high economic growth, coupled with substantial outside investment, may well transform it. Firstly, high growth and ‘opening up’ imply economic liberalization. Thus far, privatization has been muted and often involved transferring shares to quasi-state bodies or pension funds. This reflects the absence of foreign investment and shortage of domestic private-sector capital. But the 2006 decision by the Ayatollah Khamenei to back privatization of most state-owned industry is compatible with vibrant private banking, more effective capital markets and wider foreign investment.

Secondly, high economic growth is likely to increase Iranians’ expectations for material goods and better job opportunities, especially among the 35 percent of the 77 million population aged 15 ­to 29, the highest proportion recorded worldwide.  Growth may also encourage aspirations for greater social or political freedoms. In all cases, managing expectations will pose a challenge for the leaders of the Islamic Republic. After all, economic growth was high, albeit uneven across sectors, under the Shah prior to 1979.

Thirdly are implications for energy markets. Even a short-term, limited increase in oil exports — given a likely lower OPEC output in 2014, projected to drop 500,000 barrels a day by the US’s Energy Information Administration — implies other OPEC members, notably Saudi Arabia, will be cutting back. Fourthly, are political implications, in central and south Asia, and the Middle East. Supplying energy and simply being richer will enhance Iran’s influence — posing a greater challenge for opponents and critics so far unwilling to accept what the Iranian leadership sees as its legitimate role as a regional power.

Should this be seen as a disaster? Greater trade — especially alongside educational exchanges, more travel for businesspeople and simple citizens — may not just break down barriers set by sanctions. It may enmesh Iran more closely in the outside world, giving all parties more incentives to resolve disputes diplomatically. A more open, richer Iran may be more at peace with the world.

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Gareth Smyth

Gareth Smyth has reported from around the Middle East for more than two decades and is the former Financial Times correspondent in Tehran.

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