INVISIBLE HAND: Opening up the Persian pearl

By bne IntelliNews April 27, 2015

Liam Halligan -


Long-standing international sanctions against Iran could be dropped. That’s pretty astonishing given that, in the eyes of many Westerners, the country remains a pariah. The Lausanne framework agreement, which emerged after fraught negotiations in early April, means Iran – easily the world’s most significant isolated nation – could be returning to the global stage.

Even under sanctions, Iran’s $450bn economy is already among the top 25 largest on earth. Home to 81m people, it could soon get a lot bigger still. Since Hassan Rouhani became president in mid-2013, there’s been talk not only of Western rapprochement, but of Iran as an investment destination. The image Rouhani conveys – a moderate cleric, with a doctorate in law from a British university – contrasts sharply with that of his predecessor Mahmoud Ahmedinejad, a firebrand religious hardliner.

Rouhani wants Iran, in his own words, to “join the rest of the global economy”. At a series of international summits, including Davos, he has consistently positioned his country as “potentially, the most exciting emerging market on earth”. That’s sparked hoots of derision from smug fund managers sitting in London and New York. But Iran’s formidable human and natural resources mean Rouhani’s claim stacks up.

In 2012, Iranian GDP shrank 5% and inflation surged above 30%. Gripped by sanctions, Iran endured its worst financial crisis for 20 years. That’s a big reason Rouhani prevailed in elections the following year and why Supreme Leader Ali Khamenei is backing economic reforms, including negotiations with America over an end to sanctions.

Growth has returned under Rouhani – just – in part because sanctions have slightly eased, but the economy is still massively under-achieving. Iran has a highly-skilled, near-universally literate workforce, with average wages running at $500 a month – less than China. The country’s numerous universities have a long tradition of producing well-qualified scientists and engineers. The population as a whole has a vigorous median age of just 28, compared with 37 in the US and 39 in the UK. Such fundamentals augur well for rapid economic expansion.

Then, of course, there’s the stellar resource endowment. Iran boasts at least 157bn barrels of proven oil reserves – the third- or fourth-largest haul in the world, depending on how you count. There’s also 33,000bn cubic metres of confirmed natural gas – even more than Russia on the most recent estimates. As the long-term global shift from oil to gas use continues, an open, stable, well-managed Iran could eventually replace Saudi Arabia as the world’s energy lynchpin.

There’s speculation that if Lausanne is confirmed, the related easing of trade restrictions will result in Iranian oil exports quickly rising from 1.1mn to 3mn barrels a day – the average export level during the mid-1990s when sanctions were looser. Back in the early 1970s, in fact, when the Shah was in power, and Western oil companies could do pretty much as they pleased, over 5mn barrels of Iranian crude hit global markets daily. Restoring those kind of flows would make Iran twice as important a supplier as Kuwait – doing a lot to help keep a lid on global crude prices.

While a gusher of Iranian crude would please Western oil importers, I doubt it will happen soon. I hear much excited chatter about the “tens of millions of barrels” Iran has loaded on tankers, ready for immediate sale once the embargo is lifted. Such volumes are tiny fractions of yearly global crude consumption, so will do little to impact prices.

Iran’s energy industry, inevitably, has suffered from chronic underinvestment since sanctions were imposed following the 1979 US Embassy hostage crisis in Tehran. Restoring productive capacity will take money and time, which is why any sanctions deal will see just a trickle of extra Iranian oil over the next two to three years, not a flood.

Back in the mid-1950s, Iran’s real per-capita GDP was just four-fifths that of Turkey, its ancient rival. Over the 20 years that followed, free trade and economic dynamism meant growth was strong, with GDP per head soaring to more than two-and-a-half times that of Turkey. Then came Ayatollah Khomeini’s 1979 revolution, with its theocratic clampdown on business, and the economy nose-dived.

As such, Iran missed the emerging markets revolution that, from the 1980s onwards, ignited the rapid expansion of China, India, Turkey and the rest of them. Iranians are, once again, much poorer than their Turkish neighbours – a trend Rouhani is determined to reverse. “Iran is open for business,” he repeatedly tells international investors. “Come visit and see the opportunities for yourselves”.

It may surprise some to learn that Iran has a stock market, capitalized at around $170bn – about two-thirds that of Turkey. While large state block-holdings means the free-float is much less, at around $30bn, that’s still above better-known equity markets such as Nigeria. Around $150m of shares are traded daily, and there are no restrictions on foreign holdings.

No certain deal

The key to securing growth, of course, is to get sanctions lifted – in particular, the banking restrictions that block international hard-currency transfers. To do that, Rouhani will need to play ball, in terms of granting renewed access to Western oil- and gas-men. Above all, though, he must address fears (not least in Israel) that Iran’s uranium enrichment activities are aimed at building a nuclear weapon. Tehran denies this, but will still have to accept curbs and further monitoring of its nuclear program to get rid of sanctions.

In principle, the five permanent members of the United Security Council – the UK, US, China, Russia and France – have now agreed, together with Germany, to do that. No more Iranian sanctions would represent a rare diplomatic ray of sunshine across the Middle East, marking the end of a dangerous and economically debilitating stand-off.

Yet a deal is by no means certain. The specifics are due to be agreed by July, but that deadline is likely to slip. There are big differences between the post-Lausanne communiqués published by Iran, America and the UK, with each side seemingly having its own schedule for the sanctions-lifting steps – from the reduction in enriched uranium stockpiles to the modification of Iran’s heavy water reactor. Then there’s the reality that for powerful groups of naysayers – be they in America’s Congress, the Israeli Knesset or Iran’s Revolutionary Guard – any idea of a deal between Tehran and the West is anathema.

Since Lausanne, though, the diplomatic wheels have been turning. Iranian officials have made high-profile visits to China, doing deals with oil-importing giant Sinopec, to highlight that Iran has choices. Beijing, in turn, confirmed Iran’s founder membership of the China-led Asian Infrastructure Investment Bank, a rival to the Washington-based World Bank.

Russia also announced the re-activation of a deal to send sophisticated air-defense missiles to Tehran. For the US and its allies, that spells danger, as the S-300 missiles can effectively quash any preemptive strike, often threatened by Israel, on Iran’s nuclear development.

For Moscow, this renewed missile defence system sale was mostly business – winning good will with Tehran ahead of the raft of commercial opportunities an end to sanctions could bring, in energy, petrochemicals, manufacturing, or Iran’s large and sophisticated consumer market. Russia has also made other overtures to Iran since Lausanne, confirming an oil-for-goods program that will see up to half-million barrels of Iranian crude a day swapped for Russian grains and other products. Similar barter deals could follow, involving not only arms but also capital goods for the development of nuclear power plants.

The path from preliminary agreement to the actual lifting of sanctions on Iran will be rocky. Prime Minister Benjamin Netanyahu’s reaction to the prospect of rapprochement was to give a speech to Congress denouncing any deal, without consulting the White House. President Barack Obama subsequently declared Netanyahu to be “wrong” on a variety of fronts.

In the end, neutrals must hope Lausanne holds, with trade and co-operation between Iran and the West making potentially catastrophic military conflict a lot less likely – and take heart from the fact that, eventually, sanctions on Tehran will have to go. The only other way to get at the energy reserves, after all, would be to invade. And Iran is too big and powerful for that.

Liam Halligan is Editor-at-Large of Business New Europe. Follow him on Twitter @liamhalligan

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