Economic Trends: June and July

August 7, 2015

Cameron Glenn

Economic trends in June and July were heavily shaped by the nuclear deal between Iran and the world’s six major powers, which was announced on July 14. Iran is poised to benefit economically from the deal, once a number of U.N., U.S., and E.U. sanctions are lifted. European and Asian investors, businessmen, and officials flooded Iran in the weeks following the announcement, seeking to explore new economic opportunities. Iranian officials have been soliciting foreign investment, particularly in the oil and gas and automotive industries.

Domestically, Iran experienced a boost on the Tehran Stock Exchange following the deal’s announcement, and tourism income is expected to increase by 4.4 percent in 2015. Rouhani’s administration also continues to cut back on the cash handouts established under former president Mahmoud Ahmadinejad. In July, officials announced plans to suspend handouts to one million wealthy Iranians.
 
The following is a rundown of the top economic stories with links.
 
 
International
 
Sanctions
 
U.N. sanctions and nuclear-related E.U. and U.S. sanctions on Iran will be removed on the nuclear deal’s implementation day, expected to occur in early 2016. As sanctions are lifted, Iran will also recover around $100 billion in foreign exchange assets, though U.S. Treasury officials estimate that only around $50 billion of that amount will be in usable liquid assets.
 
Businessmen from Europe and Asia have been flocking to Iran in anticipation of sanctions relief. Iran is “looking for investments and new technologies, and finally an increase in our exports,” President Hassan Rouhani said on July 27. Foreign companies “are seeking a strong presence in Iran, and if we have a win-win policy in our economic planning, both sides would benefit,” according to Rouhani. Head of Iran’s Trade Development Organization Valiollah Afkhami-Rad said on July 27 that he expects Iran’s exports and domestic production to rise at least 20 percent after sanctions are lifted.
 
But officials indicated Iran will be selective in its trade partners. “We never get overexcited about the arrival of any trade delegation…we have the power to choose the best,” Government Spokesman Mohammad Baqer Nobakht said on July 28.
 
Deputy Foreign Minister Abbas Araghchi made similar remarks on July 30, stating that “European foreign ministers are queuing up to travel to Iran, but it does not mean we’ll offer them whatever they would want. Rather, it is us who have the choice.”
 
United States
 
U.S. sanctions relief will generally be restricted to nuclear-related restrictions on non-U.S. individuals and companies. A senior U.S. administration official said American companies “will still be generally prohibited from all dealing with Iranian companies, including investing in Iran or facilitating third-country trade with Iran.” Limited exceptions include civil aviation and goods like carpets, pistachios, and caviar.
 
But head of Iran’s National Carpet Center Hamid Kargar still expects an increase in carpet exports to the United States after sanctions are lifted. “Hand-woven carpet manufacturers must observe the American market and monitor the performance of rival countries so that we can boost our exports in 2016,” he said. Before the latest round of sanctions in 2010, the United States accounted for 16.5 percent of Iran’s carpet exports.
 
Additionally, on July 14, Head of Iran World Trade Center Mohammad Reza Sabzalipour announced that Iran plans to send a delegation of economic activists to the United States later this year.
 
 
Europe
 
E.U. sanctions relief will be more extensive, lifting restrictions on financial transactions, energy, investment, and other areas. European companies have been quick to explore new opportunities in the Iranian market.
 
On July 23 and 24, a conference was hosted in Vienna by the Austrian Federal Economic Chamber, Iran’s Trade Promotion Organization, and the joint chambers of commerce of Iran, France, Germany and the United Kingdom. Minister of Industry, Trade and Mine Mohammad Reza Nematzadeh led the Iranian delegation. Iran has already approved more than $2 billion in investment projects by European countries, according to Deputy Economy Minister Mohammad Khazaei.
 
Additionally, Serbian Foreign Minister Ivica Dacic visited Iran on August 3 to discuss strengthening economic ties, and Spanish Foreign Minister Jose Manuel Garcia Margallo announced that he will visit Iran in September. Food companies in Denmark, Finland, and the Netherlands are also eyeing Iran as a potential market for dairy products.

Italy
 
Italian Economic Development Minister Federica Guidi visited Iran with a team of 300 businessmen in early August. Italy, which used to be one of Iran’s major trade partners, has been trying to revive economic ties. During the visit, investment bank Mediobanca, Italy’s development ministry, and export credit agency SACE signed a memorandum of understanding “to facilitate future economic and commercial relations between the two countries.”
 

 

France
 
Minister Laurent Fabius visited Iran on July 29, meeting with Iranian Oil Minister Bijan Zanganeh and other senior officials. It was the first visit to Iran by a French foreign minister in 12 years. Fabius said France was “very firm” during the negotiations, but that it would not impact the ability of French firms to reenter Iran. French firms – particularly oil company Total and automaker Peugeot – had been active in Iran before sanctions were tightened.
 
During Fabius’ visit, Zanganeh said a “new chapter will open in cooperation with France’s Total for development of Iran’s oilfields.” Additionally, deputy head of Iran’s Civil Aviation Organization Mohammad Khodakarami said that France will explore increasing flights between Paris and Tehran. France also plans to send a delegation of businessmen to Iran in September.
 
In early July, before the deal was announced, French companies had already struck deals to renovate Iran’s cargo and passenger planes and develop railway stations.
 
Germany
 
Economy Minister Sigmar Gabriel became the first high-level European official to visit Iran after the deal was announced. “German companies are not only prepared to sell products to Iran, but also seek to expand lasting and stable economic cooperation [with Iran],” Gabriel said. But he also indicated that closer economic ties would depend on Iran improving its stance towards Israel. Gabriel was accompanied by a delegation of businessmen, and met with several Iranian officials including Oil Minister Bijan Zanganeh.
 
German and Iranian officials hope to increase bilateral trade from 2.7 billion euros in 2014 to 6 or 7 billion euros in 2016.
 
 
Greece
 
Iran plans to increase its trade with Greece to three billion euros in the next three years, according to Secretary General of the Iran-Greece Joint Council Majid Moafeq Qadiri. Iran hopes to boost exports of petrochemicals, dried fruits, carpets, minerals, and building materials. An Iranian trade delegation will visit Greece in August.
 
China
 
China – Iran’s largest trade partner – plans to ramp up its activities in Iran’s oil and gas sector. Chinese energy firms plan to pump an additional 160,000 barrels of Iranian oil per day starting in October, as part of two energy projects that had previously stalled under sanctions. China imported 671,800 barrels of Iranian crude oil per day in June 2015, up from 531,200 barrels per day in June 2014, according to Reuters.
 
Iranian Deputy Foreign Minister for Asia and Pacific Affairs Ebrahim Rahimpour met with Chinese foreign minister Wang Yi on July 28, reinforcing China’s role as a strategic partner for Iran.

Russia
 
Russian Energy Minister Aleksandr Novak said that Russia plans to explore the possibility of resuming oil and gas projects in Iran. Russian oil firm Lukoil had reopened its Iran office in April, with plans to resume operations once sanctions are lifted. Additionally, a meeting of the Russian-Iranian commission on trade and economic cooperation will be held in the fall.
 
Analysts expect that Iran’s return to the oil and gas market could have a negative impact on Russia, driving down oil prices and creating new competition. But Novak downplayed those fears, claiming that Iran’s return to the oil market will not have a significant impact on prices. “The market has assessed and absorbed all of [Iran’s comeback to the oil market] long ago," he said on July 17.
 
Domestic
 

Cash handouts

In August, Iran will suspend its monthly cash handouts to one million wealthy citizens, according to Labor and Social Welfare Minister Ali Rabiei. The monthly handouts, established by former president Mahmoud Ahmadinejad, are 455,000 rials (around $15). All Iranians had been eligible to receive them, regardless of income, but they have increasingly strained Iran’s state budget in a climate of sanctions and low oil prices.
 
 
Inflation
 
On July 13, Vice Governor for Economic Affairs at the Central Bank of Iran Peyman Ghorbani said Iran hopes to lower inflation to single digits by 2017. As of June, inflation stood around 15.6 percent.
 
Oil and Gas
 
On June 15, President Hassan Rouhani announced that Iran’s current budget is “the least oil-dependent ever.” But oil ministry officials announced plans to increase oil exports as Iran and the world’s six major powers concluded a nuclear deal. On July 6, deputy oil minister Mansour Moazzami said Iran planned to double its oil exports from 1.2 million barrels per day to 2.3 million barrels per day after sanctions are removed. On July 20, Oil Minister Bijan Zanganeh said “Gas production in Iran will surpass 1,000 million cubic meters per day in the next three days. Moreover, oil production is expected to reach 4.7 million bpd in the near future.”
 
Iran’s oil sector needs $50 billion in annual investment, according to Amir-Abbas Soltani, secretary of parliament’s energy commission. Most of these funds, Soltani said, are needed to develop Iran’s South Pars field, the world’s largest natural gas field. Deputy Oil Minister for Commerce and International Affairs Amir-Hossein Zamaninia said on July 23 that Iran could feasibly deliver liquefied natural gas to Europe within five to 10 years. Officials are aiming to implement oil and gas investment projects worth $185 billion by 2020.
 
Iran also plans to introduce new contract models, addressing some of the issues with “buy-back” contracts unpopular with foreign firms, according to Deputy Oil Minister Hossein Zamaninia. The new deals will last 20-25 years, much longer than the old contracts.
 
Auto Industry
 
Minister of Industry, Trade and Mine Mohammad Reza Nematzadeh said on July 24 that Iran hopes to produce three million vehicles by 2025, with one million units exported abroad.
 
On July 29, Iranian automaker Iran Khodro and German automaker Mercedes-Benz announced they plan to sign a five-year deal to distribute Benz cars in Iran and a 10-year deal for production of commercial vehicles.
 
Iran Khodro has also held discussions with Volkswagen and French automaker Peugeot. It hopes to expand ties with Renault and Suzuki as well, according to CEO of Iran Khodro Industrial Group Hashem Yekeh Zareh. Meanwhile, Chinese automaker Chery announced in July that its share of the Iranian market had decreased in the past year.
 
Iran’s auto industry is its second largest sector, after the oil industry, and accounts for 10 percent of Gross Domestic Product (GDP).
 
Tehran Stock Exchange
 
On July 14, stocks on the Tehran Stock Exchange rose to their highest levels since April after the nuclear deal was announced, led by oil and gas companies. The Tamim Petroleum & Petrochemical Investment Company saw the largest gains, with a 3.2 percent increase.
 

 

Growth
 
On July 1, Supreme Leader Ayatollah Ali Khamenei signed off on Iran’s economic development plan for 2015 to 2020, envisioning an average of 8 percent economic growth annually. He called for increasing foreign investment by “creating the necessary motivation and incentives,” particularly from Southeast Asia.
 
Tourism
 
The value of Iran’s tourism industry is expected to increase by 4.4 percent in 2015, according to the World Travel and Tourism Council. Iran’s investments in tourism are also expected to increase from $2.8 billion in 2014 to $2.9 billion in 2015.