January 16, 2016, marked “Implementation Day” in Iran — the day when partial sanctions against the country were officially lifted in accordance with the Iran nuclear deal. Called the Joint Comprehensive Plan of Action (JCPOA), the agreement cleared the way for Iran to sell oil, trade goods and engage in the banking sector in exchange for halting its nuclear program. The deal also allowed the country to recover a portion of its frozen assets.
As the end of the year approaches, the question remains if the economy in Iran has improved since then. From the outside, it seems like some progress is being made: Just last week, Royal Dutch Shell announced it had signed a memorandum of understanding with Iran’s state oil company for future exploration in the country, on the heels of a similar agreement between Iran and France’s Total SA for the development of a natural gas field. And this week, Boeing and Iran Air announced a $16.6 billion deal for the delivery of 80 aircraft. Back in January, France’s Airbus signed a provisional agreement with Iran to deliver 118 aircraft and to oversee the renewal of the country’s civil aviation system. That deal is expected to be finalized in the coming weeks, with the first delivery of jets expected just after the new year.
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All of this is taking place in the wake of President-elect Donald Trump’s campaign rhetoric against Iran: He labeled the Iran nuclear agreement as one of the worst deals the U.S. has ever negotiated. “It is true that Trump could unilaterally withdraw the United States from the agreement…. It is not a treaty, and foreign affairs are within the purview of the Executive,” says Philip Nichols, Wharton legal studies and business ethics professor. “But Trump will have very little leverage over the Iranians to negotiate some sort of different deal.”
Despite the recent announcements by Shell and others, the situation in Iran has not changed drastically since partial sanctions were lifted. “The general feeling is that people are frustrated because relief from sanctions [hasn’t really materialized]. Part of the disappointment results from expectations. People thought the sanctions would be lifted and everything would be glorious right afterward,” says Kyle Olson, a Penn doctoral candidate in anthropology whose research focuses on Iran.
Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, agrees. “Iran’s economic recovery was moving slowly, but steadily. Many people expected sanctions relief to led to a gold rush, but it was always going to take time to create momentum in a complicated marketplace,” he notes. However, “what is promising is that if you look at different indicators since January, all the right players who were expected to return to the market have made headway, such as Airbus, Total and Siemens.”
Olson points out that there is still a large portion of Iranian assets that are frozen in American banks because of violations including human rights abuses. According to CNN, about $50 billion in frozen Iranian assets were freed up and returned to Iran. According to Nichols, “Much of that money has gone into the resumption of commercial relationships [that existed] between Iran and European businesses before the imposition of the nuclear sanctions.”
“Trump will have very little leverage over the Iranians to negotiate some sort of different deal.”–Philip Nichols
The impact on trade also has been minimal so far. Other than for Boeing, “The lifting of the nuclear deterrence sanctions has, predictably, had little effect on direct exports from the United States,” Nichols notes. In fact, January to September exports from the United States to Iran fell by about 5% compared to the same period last year. “The numbers are so small that a 5% decrease is not that large; it just demonstrates that the lifting of one set of sanctions did not have much of an effect. Interestingly, exports from Iran to the United States during the same periods increased from nothing to about $62 million from 2015 to 2016.”
Will Trump ‘Dismantle’?
Experts are unsure how Trump will approach the Iranian deal when he takes over the Oval Office in the beginning of 2017. During his campaign, Trump referred to the Iranian deal as a “disaster” and promised to “dismantle” the agreement.
The U.S. election result was unexpected in Iran. “People in Iran and elsewhere thought it would be a [Hillary] Clinton victory. She would have continued Obama’s policy of ‘warming up’ to Iran and a continuation of the JCPOA,” says Nicholas Masoud Gilani, chief investment officer at CommoditEdge, based in Tehran, Iran and Dubai, U.A.E.
Gilani notes that Trump’s win may have put a “wrench in the works,” but it’s not a pullback. “It’s like coming to a stop sign and stopping the car until there’s more visibility, at least in the short-term. In the medium- and long-range outlook, business in Iran will continue to expand, perhaps even more under a Trump presidency,” he predicts.
“The Iran deal is not just an agreement between the U.S. and Iran,” Batmanghelidj points out. “The U.S. was the critical party in starting the negotiations with Iran, but the deal relies on the buy-in of Russia, China, France, Germany and the U.K. There are clear security and economic interests for these other countries to keep this deal alive.”
Nichols agrees. If Trump were to follow through on his campaign promises, “the European nations are unlikely to join the United States in renewing sanctions…. [Russian] President Vladimir Putin would likely veto any attempt to renew sanctions through the Security Council. So it would just be the United States. The United States could use its strength in the financial system to try to prohibit banks anywhere from interacting with Iran, but the world is probably getting a bit tired of that threat and has worked out ways around it.”
Another question is whether Europe can take on a leadership role in safeguarding the Iran deal. The deal was between Iran and Germany, France, the United Kingdom, Russia, China and the U.S. The next wave of right-wing populism is coming in Europe, along with Brexit and eurozone economic issues, adds Batmanghelidj. These challenges could distract European leaders from taking a strong stand in maintaining their agreement with Iran.
“Many people expected sanctions relief to led to a gold rush, but it was always going to take time to create momentum in a complicated marketplace.”–Esfandyar Batmanghelidj
“Oddly, if Trump should choose to attempt to destroy the sanctions deal, his best allies might the conservative element in Iran,” Nichols notes. “Conservative leaders in the religious establishment have suggested that if the United States walks away from the agreement, then Iran will resume the development of nuclear weapons. That might affect the positions of some European nations.”
Iran is often viewed as an emerging economy with a huge amount of potential. With a population of 80 million people — a large proportion of which consists of a growing middle class of consumers — it’s a market that shouldn’t be ignored, especially by business-minded leaders, like Trump. “Iran’s GDP is bigger than South Africa’s. It’s the largest emerging market in the world and the largest economic market outside the G20. I hope the economic issues will take over political issues and act as a bridge,” says Gilani.
According to a report from the McKinsey Global Institute, Iran could increase its GDP by $1 trillion and create nine million jobs by 2035. It was the 18th largest economy in the world in 2014. Iran has the largest gas reserve and the fourth-largest oil reserve in the world. Moreover, Iran’s economy is highly diversified, since oil and gas account for just 23% of gross value added. Copper and zinc reserves are significant. Real estate and construction make up a sizable proportion of the economy. Gilani points out that Iran has the largest automotive sector in North Africa and Western Asia, and European automotive companies are taking notice. In 2014, Iran produced more than a million vehicles.
However, there are still major challenges confronting those hoping to do business there, Nichols points out. “One difficulty that some firms, particularly small- and medium-sized firms, have faced is financing. Arguably, the [U.S.] Office of Foreign Asset Control must still issue licenses and permissions for banks chartered in the United States to work with Iranian banks, and U.S. banks have been reluctant to seek those permissions or attempt to create those relationships, so financing transactions remains difficult.”
Another stumbling block is that “Iranian banks need to go through substantial reforms to meet international standards for regulatory compliance and risk management,” adds Batmanghelidj, who says that this process is now underway. What’s more, Gilani points out, Iranian banks are in a “state of dysfunction saddled with nonperforming loans and inadequate capital in accordance with the Basel [Accords],” a set of international standards recommended to regulate the banking sector.
“Business in Iran will continue to expand, perhaps even more under a Trump presidency.”–Nicholas Masoud Gilani
Despite these challenges, the high-profile deals that have been inked over the course of the year are creating some momentum. Boeing’s deal, which was approved by the U.S. government in September, also allows the company to lease 29 new Boeing 737s to Iran Air. Batmanghelidj says the leasing program is one way that American companies are finding solutions for financing, since sanctions still prohibit U.S. dollars from being used in transactions. “In the scheme of things, it may look like small steps, but it indicates that these large companies are committed to finding creative pathways to trade in Iran. Expectations around the Airbus and Boeing deals are high because they are test cases for how companies should manage the litany of regulatory and financial challenges” in doing business with Iran, he says.
Another indication that American companies are making inroads is that AT&T is providing voice and data service to American cell phones in Iran, according to The New York Times. In a partnership with RighTel, owned by the Social Security Organization of Iran, which is a state entity with holdings in several Iranian banks, AT&T’s American customers can now make and receive phone calls in Iran.
Moreover, technology ventures are starting to take shape. Pomegranate Investment, based in Sweden, has committed to 60 million euros in direct investment in consumer technology start-ups. “Institutional investment has been limited, but the fact there has been significant private capital invested is encouraging,” says Batmanghelidj. “Consumer technologies are a particularly attractive sector given Iran’s youthful demographics and high adoption rates of mobile and digital products. The Iranian president has Twitter and Instagram accounts.”
Iran is the “most secular and pro-American country in the entire Islamic world,” adds Gilani. Trump is “not an ideologue. He’s going to do the math,” and he won’t want to ignore the significant population size in Iran with its huge market potential.
Regardless, Iran has weighty issues to battle on its path to economic recovery. “The two greatest challenges are first the fact that the United States continues to impose numerous other sanctions on Iran, and second, the fact that Iran’s economy continues to be dominated by the government or its cronies,” says Nichols.
Article by Knowledge@Wharton