After years of negotiations the international community finally lifted its sanctions on Iran in mid-January. This clears the way for a return to the global stage of the world’s 28th largest economy: the single biggest diplomatically-driven economic game-changer since the fall of the Iron Curtain in 1989.
Iran currently holds 9.3% of the world’s proven oil reserves and a massive 18.2% of the world’s proven gas reserves, according to British Petroleum. Leaving aside the political and security implications of the deal, this briefing looks at what the outcome means over the next few years for Iran, the region and the world in terms of economic and commercial impacts.
A number of caveats should be noted in respect of the lifting of sanctions. First, the sanctions can be reapplied at any time if Iran is found to be in contravention of the agreement. Sanctions would then be reapplied for at least ten years, with a possible extension for a further five years. In addition, a number of sanctions remain in place, including a UN arms embargo for the next five years. More importantly, a number of US sanctions predate the nuclear dispute, stretching back as far as the Tehran embassy hostage crisis in 1979, while sanctions remain in place against persons and companies with links to the Revolutionary Guards. Both these sets of sanctions are unlikely to be lifted in the medium term.
Indeed, we expect the Republican-dominated Congress to continue to try and impose further sanctions, although it is likely that any far-reaching measures would be overturned by President Obama.
A Republican president, however, would be likely to support further sanctions, ensuring that risks for US businesses dealing with Iran remain elevated. Although the Iranian economy and businesses will undoubtedly benefit from the lifting of sanctions, we must caution that a number of factors will curtail potential business activity. First, in relation to the hydrocarbon sector, Tehran’s latest contracts do not meet international norms, although they are better than previous versions and have met with approval from the international oil companies. Second, the business environment remains challenging: the World Bank’s 2016 Doing Business Reportranks Iran 118 out of 189 countries surveyed, and corruption is endemic (in Transparency International’s 2015 Corruptions Perception Index, Iran was ranked at 130 out of the 168 countries surveyed).
Additionally, much business activity is dominated by quasi-state companies such as the bonyads(charitable foundations) controlled by the clergy and the business wing of the Revolutionary Guards. This creates an uneven playing field, not just for foreign companies but also for domestic companies without links to the political establishment. Regionally the deal will have positive and negative impacts.
Countries that act as an entrepôt hub for Iran, such as the UAE, will benefit from the increased trade opportunities and from the provision of business services. The weakening of oil prices, however, will also curtail economic growth potential in these same countries. More broadly, we expect that companies from regional countries that have helped Iran by-pass or mitigate the sanctions regime, such as the Gulf states and Turkey, will be favoured in the post-sanctions environment, putting Western companies at a possible disadvantage.
At a global level the deal will boost trade and investment flows at a time when both flows are weak due to other headwinds in the global economy, such as lower Chinese growth. Furthermore, it will ensure that downward pressure remains on oil and gas prices into the medium term as access to the country’s vast reserves is opened up fully, boosting profitability in global energy-intensive manufacturing and transportation sectors in the short term, but curtailing investment in the oil and gas sector. Importantly, the lack of investment will result in a sharp rebound in energy prices into the medium term as supply falls behind demand.