Economic Trends: February and March

April 5, 2016
Cameron Glenn
 
In February and March, Iran began reaping the economic benefits of the nuclear deal that was implemented in January. Following the lifting or suspension of E.U., U.S. and U.N. sanctions, the Islamic Republic hosted trade delegations, inked lucrative deals, and boosted oil exports to 2.2 million barrels per day. Even American companies – particularly Boeing and General Electric – began exploring the possibility of doing business in Iran.
 
But sanctions relief has not revived the ailing Iranian economy overnight. Increased oil outputs have generated limited revenues, as oil prices remained near record lows. Some international banks and investors are still wary of doing business in Iran because of remaining U.S. sanctions for terrorism and human rights abuses. And some Iranian hardliners questioned whether Iran should be focused on foreign investment in the first place. In March, President Ayatollah Ali Khamenei called for a greater focus on domestic resources and production and claimed that the dozens of foreign trade delegations had yielded few tangible benefits for the Islamic Republic. The following is a rundown of economic developments in February and March.
 
Sanctions Relief
 
The Tehran stock market rose 22 percent in the first month after sanctions were lifted in January. Iran regained access to around $100 billion in assets, though much of that amount was tied up in existing debts. In the short term, only about $7 billion will be transferred to Iran to avoid sparking inflation, according to government spokesman Mohammad Bagher Nobakht.
 
On February 7, French automaker Peugeot announced that it would pay Iran $446 million in compensation for losses after the company withdrew due to sanctions in 2012. On March 8, Shell settled the $1.94 billion it owed the National Iranian Oil Company but had been unable to pay due to sanctions. Iran also won its first major court battle since sanctions were lifted. On February 18, an E.U. court ruled that Iranian Bank Mellat’s assets should not have been frozen in 2010 over alleged links to Iran’s nuclear program. The bank is pursuing billions of dollars in damages from the United Kingdom.
 
Sanctions relief has also allowed Iran to reconnect to the international banking system. In February, several Iranian banks were connected to the SWIFT global transaction network. Turkish credit card company Iyzico announced in February that it will begin allowing its customers to process payments from Iran.
 
Despite the benefits of sanctions relief, some international banks are still cautious about reconnecting with Iran, fearing they will run afoul of remaining U.S. sanctions on Iran for terrorism and human rights violations. On February 4, during an event at Chatham House in London, Foreign Minister Mohammad Javad Zarif said that European banks may require “further assurance” from the United States that they would not be penalized for doing business with Iran.

Oil & Gas
 
Iranian officials have promised a quick increase in oil production now that sanctions have been lifted. In early February, Vice President Es’haq Jahangiri said that Iran had increased oil exports to 1.3 million barrels per day. On March 23, Jahangiri announced that exports had reached 2.2 million barrels per day – an increase of 900,000 barrels per day since January.
 
Europe and Asia have been the main beneficiaries of Iran’s increased oil output. On February 14, Iran began exporting its first shipment of oil to Europe since sanctions were lifted. Oil Minister Bijan Zanganeh said that French oil company Total would begin importing 160,000 barrels of Iranian oil per day. Italian oil company Eni is also in talks to revive oil imports from Iran. And South Korea imported 3.26 million barrels of oil from Iran in February – 20 percent more than the same period a year ago.
 
Despite the recent boost in production and exports, Iran’s oil industry still desperately needs foreign investment. On February 9, Zanganeh said Iran requires $200 billion to “develop the joint fields and enhance recovery of oil reservoirs,” noting that domestic resources will not be enough to meet those goals. Iran canceled a February oil conference in London where it intended to roll out new investment contracts for international firms. Iranian officials cited visa issues as a reason for cancelation. Hardliners in Iran oppose the new contracts, claiming that they allow Iran’s natural resources to be owned by foreigners.
 
Additionally, low oil prices limit the new revenue Iran will gain from increased output – and its policy of boosting production put it at odds with other oil producers. In February, low oil prices prompted several major oil producers – including Russia and OPEC members Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and Venezuela – to call for a production freeze. Iran supported the idea of the freeze, but said that Iran should not be required to participate. “Iran is not the cause for this turmoil…We do not intend to sanction ourselves again,” Deputy Oil Minister Hossein Zamaninia told CNN in February. Oil Minister Bijan Zanganeh called it a “joke” that Iran would be required to freeze its oil output.
 
Diversification
 
As oil prices remained low, Iranian officials pushed for greater diversification of the economy. “Our past experience showed that oil at $147 [per barrel] cannot solve our employment and public welfare problems,” President Hassan Rouhani said at a labor forum in February. Parliamentary Speaker Ali Larijani praised Iran’s reduced dependence on oil. "There are many countries that were disturbed by plummeting oil prices, but Iran was not affected much," he said on February 8. Only around 25 percent of Iran’s budget for the next fiscal year relies on oil revenues, compared to 60 percent in past years.
 
The Islamic Republic hopes that investing in other industries, such as agriculture and food exports, will contribute to diversifying the economy. Business delegations from France have reportedly expressed interest in investing in Iran’s agribusiness.
 
Foreign investment
 
Iran has hosted a flurry of international trade delegations since the nuclear deal was implemented in January. On February 20, Economy Minister Ali Tayyebnia said that Iran is seeking $45 billion in foreign investment in the next few years. But Iranian officials disagree on the extent to which Iran should open its economy to the rest of the world. Supreme Leader Ayatollah Ali Khamenei said that the delegations have not yet yielded real economic benefits. “We haven’t seen anything tangible from these delegations visiting Iran,” he said on March 10. “Promises on paper have no value.”
 
On March 20, Khamenei said in his speech on Nowruz – the Persian new year – that the theme of the upcoming year would be “The Resistance Economy: Action and Implementation.” Focusing on domestic production, Khamenei argued, is Iran’s best defense against sanctions and the way to properly address other problems such as unemployment. “With the Resistance Economy, it is possible to fight unemployment and recession and to curb inflation; it is possible to stand up to the enemies’ threats; it is possible to create numerous opportunities for the country and use those opportunities,” he said.
 
Khamenei’s statement contrasts with President Hassan Rouhani’s focus on foreign trade and investment. In a March 16 cabinet session, President Rouhani called on Iran to continue its “constructive interaction with the world.” But on March 22, the president’s chief of staff Mohammad Nahavandian tied the concept of a “resistance economy” to foreign outreach. “To increase the resistance of Iran’s economy, we should expand ties with neighboring countries and the world,” he said.
 
Two thirds of Iranians support greater economic engagement with the West. The first round of Iran's parliamentary elections, held in February, yielded success for the Universal Coalition of Refomists, an electoral list associated with support for the nuclear deal and increasing normalization of Iranian political and economic relations with the outside world. But hardliners echo Khamenei’s fear that opening Iran to foreign investment will make the Islamic Republic too economically dependent on other countries. And some Iranian businessmen fear that foreign funds are being channeled only into large state-run enterprises rather than the private sector. Banking restrictions under remaining sanctions make it difficult for small businesses to benefit from the new rush of foreign investment.
 
Delegations and officials from the following countries reached out to Iran in February and March.
 
  • On February 15, Italy’s Maire Tecnimont engineering company signed a 1 billion euro collaboration agreement to build refineries and petrochemical plants in Iran.
  • On February 27, the Swiss president Johann Schneider-Ammann met with President Rouhani in Tehran and agreed on a roadmap to increase business and financial ties.
  • On February 29, the foreign minister of Romania arrived in Tehran to discuss renewing economic and diplomatic ties with Iran.
  • On February 29, Singapore signed an investment treaty with Iran to support companies looking to enter Iran.
  • On February 29, the Austrian environment minister said that Vienna hopes to restore economic and environmental ties with Iran to pre-sanctions levels.
  • On March 1, South Korea and Iran signed a maritime agreement granting Korean firms greater access to Iranian markets.
  • On March 3, a Turkish business delegation visited Iran to discuss boosting trade and economic ties.
  • On March 10, the United Kingdom’s export credit agency signed a memorandum of understanding with its Iranian counterpart to facilitate trade between the two countries.
  • On March 13, the foreign ministers of New Zealand and Iran met in Wellington and discussed expanding bilateral economic relations. New Zealand lifted sanctions on Iran on February 19.
  • On March 24, Iraq and Iran discussed increasing non-oil trade between the two countries.
  • On March 26, Pakistan and Iran agreed to increase their bilateral trade to $5 billion.
 
United States
 
U.S. companies are still generally barred from doing business with Iran, but some firms are interested in entering the Iranian market. In February, Boeing received permission from the U.S. Government to begin talks with Iranian airlines. The firm will need separate approval to actually begin sales in Iran. General Electric is also reportedly exploring business opportunities in Iran, particularly for its oil and gas business.
 
On March 20, Supreme Leader Ayatollah Ali Khamenei accused the United States of not fulfilling its pledges under the nuclear deal citing holdups on Iran regaining access to the banking system and its assets. "In Western countries and places which are under U.S. influence, our banking transactions and the repatriation of our funds from their banks face problems ... because (banks) fear the Americans," he said. U.S. officials, however, denied the allegation and insisted that Washington was complying with its obligations under the nuclear deal.
 
In late March, the U.S. Treasury was reportedly considering allowing overseas financial institutions to use U.S. dollars in transactions with Iran, a practice currently prohibited under sanctions. But U.S. officials later emphasized that Washington had no plans to grant Iran access to the U.S. financial system.
 
China
 
The volume of trade between Iran and China – the Islamic Republic’s largest trade partner – dropped 41 percent in the past year, in part due to low oil prices. China’s share of Iran’s auto industry is also expected to decline now that European manufacturers can enter the market. In March, the United States imposed sanctions on Chinese firm ZTE, a large supplier of telecommunications equipment, for selling U.S. technology goods to Iran.
 
But Iran and China have pledged to strengthen economic ties in the next ten years. On February 15, the first train connecting Iran and China arrived in Tehran carrying Chinese goods. The shipment is part of China’s “One Belt One Road” initiative, designed to revive overland Silk Road trade routes. In March, the Export-Import Bank of China made plans to provide funds for petrochemical and communications projects in Iran. Two Chinese firms also reportedly began to finalize deals worth billions of dollars in Iran’s railway and shipping sectors.
 
Russia
 
Russian aircraft manufacturer Sukhoi, automaker Avtovaz, and oil and gas companies Lukoil and Gazprom are among the firms preparing to do business in the Islamic Republic. Iran plans to hold an exhibition of high-quality food stuffs in Moscow in April, according to Mohammad Hossein Azizi, Chairman of the board of directors for Food Industries Association of Iran. Iranian food producers hope to expand into the Russian market. In March, Oil Minister Bijan Zanganeh said that Iran was interested in trading oil and gas with Russia and pursuing Russian investments in Iran’s oil and gas fields.
 
Auto industry
 
President Hassan Rouhani called for less government involvement in the auto industry. “Iran’s automotive industry should be completely privatized and competitive,” he said in a March 1 speech to the International Automotive Conference. Government support, he argued, was necessary under sanctions but “cannot be unlimited.”
 
In late February, Iran signed three memoranda of understanding with Swedish, Turkish, and Indian automakers. Iranian automaker Iran Khodro announced in March that it expects to sign a deal with German carmaker Mercedes-Benz in the next six months.
 
Aviation
 
On March 9, Iran’s Civil Aviation Organization signed a memorandum of understanding with its British counterpart to increase passenger and cargo flights between the United Kingdom and Iran. Also in March, Iran signed a memorandum of understanding with German company Lufthansa to provide logistics support to Iran’s airlines.