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Iran, the Latest Outstanding Emerging Market

Iran, the Latest Outstanding Emerging Market

Iran advertises a vast array of opportunities and advantages for investment, starting with the highest level of security in the region, human capital (having a population of approximately 80 million people), a young, well-educated and skilled labor force as well as rich energy reserves. Its location on the Persian Gulf eases its integration into global markets, as well as offering a strategic position in proximity to the growing Gulf region’s financial and trading hubs. While managing the previously delayed development of its potential, Iran must contend with burgeoning regional rivalries, a challenging security environment on both its Western and Eastern borders and the follow-through on the normalization of relations with the global community. The reward for its persistence will be the rising prosperity of its people, regional influence and prestige commensurate with its size and strategic positioning.

The nuclear agreement signed in July 2015 between Iran and the P5+1 Group [i] signified a strong return of the Islamic Republic of Iran to the international arena. As a result, the West, notably the European Union (EU), is already talking business with Iran, which is pursuing trade volume growth and consequent increases in the Iranian GDP and the strength of its national currency.

The Joint Comprehensive Plan of Action (JCPOA) is considered an historic agreement related to the non-proliferation of nuclear weapons that was possible due to the tenacity of the Iranian diplomacy. It is a standing proof of settling disputes through negotiation and diplomacy instead of rushing headlong towards military action.

It took two years of perseverance for the Iranian nuclear team headed by the Foreign Affairs Minister, Mohammad J. Zarif, to strike the deal on July 14th 2015. Starting with January 16th 2016, the JCPOA has entered into its implementation phase.

The natural economic fit between Iran and the EU

There are several areas in which Iran and EU manifest common interests, such as remarkable circumstances for cooperation in the fields of energy and technology for mutual benefit. The necessary process of cooperation can be jumpstarted on the basis of prior traditional and historical bilateral ties. Moreover, in terms of collective mechanisms and within the framework of the bilateral relations, the fight against major threats such as the spread of terrorism, extremism, violence and organized crime, can be designated a priority for cooperation and pursued closely. Iran’s growing role in Middle Eastern affairs can be seized on by the EU to pursue its own interest in stabilizing this region (resulting in more stable European borders in the South).

The environment created by the JCPOA has given an impetus for European countries to re-examine cooperation with Iran. The countries of the current EU used to be a traditional trade partners for Iran before the sanctions regime was instated and are looking into new opportunities in the aftermath of the deal. Iran and EU should also reaffirm on this occasion the determination to make efforts to restore peace and stability in the Middle East, primarily in Syria (therefore stabilizing the migrant flows towards and Iran’s challenging near abroad).

When it comes to business, without making claims to an exhaustive listing of the opportunities, among the areas with high appeal to foreign investors are the upstream and downstream petroleum industry, the petrochemical industry, the automotive industry, machine building, pharmaceuticals, tourism and mining. The Iranian government has established a five-year economic plan (2016-2021) to revive investment and listed for privatization major companies, among which there are large petrochemical companies, banks, insurance companies and steel mills.

Investments… in hard currency

The year 2016 illustrates a promising start in this direction. Italian and French businesses were among the first to take part in restoration of ties. For example, the automobile group, Peugeot-Citroen said it will return to Iran for a joint venture worth €400 m (a decision taken at the end of January 2016), whereas Iran expressed willingness to buy at least 100 Airbus planes (a very lucrative deal for the French counterpart). Prior to the visit to France, President Hassan Rouhani has toured Italy (25 January 2016), concluding business deals estimated at around $18 billion. The Italian Prime Minister Matteo Renzi visited Tehran in April 2016 with a significant delegation concluding arrangement for business worth billions. For example, Enel (ENEI.MI) announced the signing of a Memorandum of Understanding with the National Iranian Gas Export Company regarding cooperation in natural gas, Liquefied Natural Gas (LNG) and related infrastructure. The Italian Oil company ENI has sealed a deal that allows accepting oil from Iran as payment in advance for prior investment. The other contracts on the table were related to the automotive industry, tourism, renewable energy, airport construction, railways, and exhibition staging.

German companies and notably the industry conglomerate Siemens AG have announced plans to invest massively in Iran. In the first six months of this year, according to Iranian statistics, German exports to Iran grew 15%, to €1.13 billion.

The United Kingdom is also seeking closer business ties, mainly through the presence of British Petroleum. The diplomatic ties between the two countries were restored in the aftermath of the deal (on August 23rd 2015 the embassy in Tehran was officially re-opened). [ii]

Iran is not an economic monoculture critically dependent on resource exploitation, given that Iran’s economy is composed of other key sectors for employment and growth, besides the oil and gas industry, such as steel, textiles, and automotive manufacturing that account for the lion’s share of the Iranian GDP [iii]. Manufacturing is complemented by a strong agricultural sector which will require investment and growing sophistication to manage under the country’s worsening water scarcity profile. The services sector, including financial services, despite being cut-off from the global financial markets, is at a level where it can serve as a catalyst for GDP.

In 2012, Iran’s total trade volume for both import and exports was about $195 billion (Eurostat/IMF). Most of Iran’s trade was concluded with BRICS countries (Brazil, Russia, India, China and South Africa) – with a total value of $56 billion (or 28% of Iran’s total trade value). Of these, China alone had $30 billion and India about $16 billion. Iran was trading approximately $17 billion with the EU (about 9%). [iv]

An energy giant awakens

The attractiveness of Iran is consolidated by its impressive hydrocarbon resources, having the second largest natural gas reserves and the fourth largest oil reserves in the world. With an estimated 158 billion barrels of proven crude oil reserves, representing almost 10% of the world’s crude oil reserves and 13% of reserves held by the Organization of the Petroleum Exporting Countries (OPEC) members [v], the Iranian return on the energy markets in the aftermath of the deal is likely to challenge the current state of affairs, with Iran chafing under the dominance of OPEC of its erstwhile geopolitical rival, Saudi Arabia. Moreover, the Iranian authorities are making a determined effort to revive and rebuild Iran’s oil and gas industry, further increasing output on the global markets. The sector needs investment and technology in order to attain the proposed target.

In the quest for attracting foreign investments and boosting production, Iran has formulated a mechanism for its prospective oil and gas contracts. The proposed framework is widely known as the Iran Petroleum Contract (IPC) that is set to represent the basic structure regarding all future petroleum contracts in Iran, replacing the buyback model. Iran’s oil minister, Bijan Zangeneh, a highly respected professional in the industry, has lobbied for the IPC, overcoming critics from the political hardliners in Tehran. The minister aims for $185 billion of foreign investment by 2020 and, in pursuance of this outcome, has warned that Iran will otherwise lose its position as a top energy producer.

It proves that, in the long run, Iran’s strategy is to emerge as one of the most powerful players in the oil market, both in the crude oil and petrochemical sectors.

Future trends – conflict and cooperation

Many analysts argue there’s a new reality emerging shaping behavior among both consumers and producers. The fossil fuel market is likely to become more competitive, according to changing circumstances of price, production, market shares and technology. In such a context, conflicts can arise. Iran is already facing competition (manifested in the oil and gas market and beyond) together with strong opposition from its geopolitical rival Saudi Arabia within OPEC itself. Saudi Arabia has also attempted to use its influence to sway the Gulf Cooperation Council (GCC) countries’ stance relative to Iran. However, within the UAE, across the narrow Persian Gulf from Iran, Dubai has always displayed interest in trade with Iran, considering it an important partner, while the Emirates’ capital - Abu Dhabi - is more attached to Saudi Arabia’s position. Qatar, a big player in the gas and LNG markets is interested in a good neighbor policy, since South Pars, the world’s largest gas field is shared between Iran and Qatar. Oman, a smaller player in the oil and gas industry (compared to other GCC players) is interested (and has succeeded) in maintaining a balanced relation with both Saudi Arabia and Iran, having served as a useful go-between during disputes between Riyadh and Tehran, and would not oppose Iran’s plans for developing its strategic oil and gas industry.

China is predicted to remain a powerful trade partner for Iran as a strong partnership between the two countries has been forged during the sanctions regime Iran. To this pole position advantage for China, one can also add the fact that the United States is still reluctant to review its internal regulations in order to ease restrictions in the business area, which is preventing the undoubtedly interested American companies from launching sizeable investment projects in Iran.

Russia perceives Iran as the biggest competitor for the European energy market, Iran being able to construct energy corridors towards Europe and weaken Russia’s monopoly. However, on security issues, the nuclear deal paved the way for Russia developing relations with Iran with regards to the Syrian crisis, cemented by strategic arms deals.

Turkey is visibly interested when it comes to developing economic relations with Iran, notably after the shift in politics, in the context of the failed coup d’état in July 2016. Turkey is keen to cooperate with Iran in the strategic oil and gas sector (and also in other areas), in order to fulfill the ambitious trade deals prepared by Tehran and Ankara and to increase its own strategic leverage as a vital energy transit country.

Given Iran’s increasing role in the world economy, Romania has mobilized a business delegation together with Foreign Affairs officials in March 2016, expressing the certainty that the signing of the nuclear agreements, followed by the lifting the sanctions will have a major, positive impact on re-launching of Romanian-Iranian relations in numerous domains.

The two countries have the potential and complementarity to enhance bilateral ties [vi], ranging from business, science, research and development, education and culture.

The high-level meeting emphasized the value of bilateral cooperation, highlighting particularly the interest in attractive domains such as industry, energy, petro-chemistry, oil and gas, farming; transports, education, IT and research and development.

Conclusion

The emergence of Iran is a significant game changer for the security and economic dynamics of the Middle East and Central Asia in the next years. The successful economic development of Iran would strengthen its middle class and enhance President Rouhani’s policy role in Iran, giving weight and influence to his reformist vision. Major infrastructure projects in energy should be integrated into an overarching regional infrastructure development plan, connecting it to East Asian, but also to European and Near East markets. Currently, foreign investments are vital for the rapid development of the Iranian energy sector, and their results will become apparent in the next few years. In the medium term, we are likely to witness an economic rivalry between the states of the region, punctuated by other forms of indirect clashes between regional powers in the middle of a strategic rebalancing. Buffeted by areas of instability and states with weak institutions, Iran needs to lead the regional economic stabilization process and to assume an active role and stance with regards to ameliorating the cause of the region’s endemic insecurity and penury.

Middle East Political and Economic Institute (MEPEI) played a particular role in setting the premises for enhancing the bilateral ties ever since September 2015, having gathered an economic and academic delegation that visited key Iranian cities and ministries, bringing back hands-on identification of fields and contacts capable to empower mutual cooperation.

Notes:

[i] P5+1 Group: United States of America, United Kingdom, China, Russia, France and Germany.
[ii] In November 2011 the diplomatic ties were deteriorated to the point of closure of the UK embassy in Tehran, on the grounds of the sanctions regime.
[iii] GDP of Iran (purchasing power parity): $1.371 trillion (2015 est.), ranking 20th in the world, according to the CIA World Fact book.
[vi] For the reference, the Romanian exports in 2014 accounted for $110.54 m and the imports for $6 m. In terms of products, the range was: automobile components and assemblies, cereals and wagon assemblies.
French-Iranian collaboration: Group RENAULT - Iran Khodro for making Renault Tondar, the Iranian equivalent of Logan. Romania just delivers the components necessary to assembly the product and ensures technical assistance during the manufacturing process, including training for the Iranian employees in Romania.
 
Iran, the Latest Outstanding Emerging Market
 
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OEconomica No. 1, 2016