How the Islamic State presented Iran with an unprecedented economic opportunity
The menace of ISIL has presented Iran with an opportunity to liberate its economy from sanctions by emerging as a responsible regional power.
Iran and the five permanent members of the UN Security Council, along with Germany (also known as the P5 +1) have set a deadline of November 24 to resolve their dispute over Tehran’s nuclear programme.
“If they miss the deadline there will be a serious risk of total breakdown since the US Congress will probably enact further sanctions,” Sir Richard Dalton, the UK’s ambassador to Iran from 2002 to 2006, tells Gulf Business.
World powers have imposed crippling sanctions on Iran in an effort to arrest Tehran’s nuclear programme, which many countries believe could threaten the region.
The stepped-up sanctions imposed by the US and the EU since 2012 have inflicted heavy damage on Iran’s economy, notes the Institute of International Finance.
“Overall, real GDP contracted by a cumulative 8.6 per cent in the past two fiscal years. Taking account of the sharp depreciation of the two exchange rates, we estimate that nominal GDP fell from a peak of $490 billion in FY2011/12 to $344 billion in FY2013/14.”
Iran’s fiscal accounts have deteriorated since the imposition of sanctions, with prior surpluses turning into small deficits in the past two years.
The Persian state is desperate to liberate its economy from Western sanctions that have cut oil revenues in half and restricted business dealings with the outside world.
Yet despite this, it has not stopped its march to develop nuclear centrifuges, according to a senior Iranian official.
“We can say in Iran that we suffered, our economic growth and development suffered, our people suffered, but…we have 19,800 centrifuges,” Foreign Minister Javad Zarif told a US audience n September in New York at the Council on Foreign Relations, a think tank.
“Well, let me ask you: What does the United States see as benefits of the sanctions policy? What has the United States gained? 19,800 centrifuges is one gain. Another gain is the resentment of the Iranian population.”
During this time, the country has watched its neighbourhood scorched by Islamic militant group ISIL that has run amok across the Iraq and Syrian borders.
While Tehran has played its part in containing ISIL, it is not part of the US-led coalition which recently launched air strikes against the group.
“While Iran-backed Shi’ite militias in Iraq have played an important role in preventing the Islamic State from threatening Baghdad and pushing further south, their ability to reverse gains have so far been limited,” notes risk management consultancy Maplecroft in a report.
Despite Tehran’s exclusion from the coalition, the US, Saudi Arabia and Iran find themselves in the odd position of being united against the militant group.
Tehran is looking for ways to leverage the ISIL crisis to its advantage. By appearing as a responsible government eager to stamp out the terrorist group, it has already earned points among the global community.
But Sir Dalton believes fighting on the same side as the US will not help Iran.
“No – the nuclear issue is separate from all others; the UN, US and EU bilateral sanctions have precise legislative justifications (including nuclear, and for US terrorism and human rights issues) which could not be withdrawn on the basis of direct involvement against ISIS,” Sir Dalton says.
Iran’s eyes, however, are on the big prize: A complete lifting of sanctions could open the way for trade with its Gulf neighbours.
“Its population of nearly 80 million is more than three times that of the six GCC member-states combined, while
its workforce is in demand throughout the region (except for Saudi Arabia) due to its advanced education, professional skills, and training,” Iran Project, a Washington-based think tank focused on improving the United States’ relationship with Iran, says in a report.
“Around 500,000 Iranians live and work in the United Arab Emirates alone.”
Easier access to trade with a whole range of countries including Turkey, the UAE, Qatar and Egypt offers Iran opportunities to expand its export markets for products and services.
Indeed, there is potential for greater intra-regional trade in natural gas, which is desperately needed by Kuwait and Oman, both of which have struck gas export deals with Iran.
“With additional development of Iranian infrastructure, there may also be beneficial trade between Iran and the Gulf Arab states in gas or energy- related industries such as aluminium or petrochemicals,” says Paul Pillar, an analyst with Iran Project.
“From a Saudi economic perspective, what matters most is not overall size of the players but the comparative advantage of any one type of trade,” he adds.
Agreement to strict long-term limits to its nuclear activities and intrusive inspections would clarify that Iran is serious, The Iran Project suggests.
“Moreover, a substantial period of more open engagement with the world would increase Tehran’s economic and political stake in upholding the agreement.”
Iran, which has been unable to export its crude oil freely to the oil markets, has suffered huge losses in recent years, with its economy weakening, and its currency heavily battered.
“Facing continued constraints on oil revenues and to carry out international transactions, the economy is expected
to continue to contract in 2013/14,” the International Monetary Fund reports in its latest assessment of the country’s economy.
“With some positive tailwinds from the external side and modest incipient signs that the pace of contraction in domestic demand is slowing, economic activity would begin to stabilise in 2014/15.”
Indeed, global powers did provide some limited relief to Iran after an interim agreement was reached in November 2013.
The country was allowed to stabilise its crude oil sales to around 1 million bpd and access $4.2 billion of its own funds held abroad in the six months following the agreement taking effect on January 20, 2014.
“Sanctions on Iran’s petrochemical exports, the automobile industry, and on the trading of gold and precious metals, were also waived temporarily, potentially providing $1.5 billion in revenue,” the IMF notes.
The US and the EU also committed to establish a financial channel to facilitate humanitarian trade with Iran, including for civil aviation needs and to enable payment of tuition fees for Iranian students abroad.
“All in all, Iran would be able to dispense about $6 to $7 billion (2 per cent of GDP) during the six months following its implementation on January 20, 2014.”
If a final accord on all outstanding issues is reached in November of this year, possibly leading to the normalisation of Iran’s relations with the international community, the economic and geopolitical implications would be quite significant for Iran and for the region, notes the IIF.
Could a common enemy in ISIL (pictured) improve Iran’s relations with Saudi and the US?
￼￼￼“In this scenario, most existing sanctions could be lifted, albeit gradually, leading to a rebound in crude exports to 2.2 million barrels per day (from 1.3 mbpd), and a possible restoration of access to the global financial system,” the IIF says.
“FDI into the energy sector, long starved for investment and technical knowhow, could return and eventually help Iran
raise oil production, perhaps beyond pre- sanctions levels in the long term.”
More ambitiously, Iran could also begin to enlarge its role in global energy markets, with important implications for other major producers in the region and global oil prices.
But it is going to be a rocky road.
The meeting of the Saudi Foreign Minister with his Iranian counterpart in New York in September raised hopes of a reconciliation, but analysts are downplaying any impact.
“There will remain suspicions and distrust with ethnic and sectarian roots, but there is a history of the parties
on each side of the Gulf being able to improve relations with each other,” Pillar says.
“Common concern about ISIL provides a fresh incentive for rapprochement.
If the United States and its negotiating partners reach a nuclear deal with Iran, the incentive of the Gulf Arab states to improve their relations with Iran will be all the greater.”
The Eurasia Group notes that while Saudi officials seek to weaken ISIL, there is still an appetite to exploit it in order to weaken Tehran.
“Despite some signals over the summer that Iran and Saudi Arabia were exploring diplomatic pathways to easing conflict and improving the prospects of cooperation over regional issues, tensions have once again intensified, further undermining regional stability,” says Ayman Kamal, director, Middle East & North Africa at Eurasia Group, noting that Iran and Saudi Arabia are at odds on strategy in Iraq, Syria and Yemen.
A failure to sign an accord could have dangerous consequences: Iran’s eventual acquisition of a nuclear weapon, a greatly reduced chance of defeating major threats elsewhere in the region, and even war, analysts warn.
The next few weeks will be crucial for Iran as it looks to navigate the tricky path towards peace amid chaos in the region, and the prospect of a full return to the global economy.
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