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It is not unheard of for countries to impose embargoes on other countries as a tool of diplomacy, but it’s the businesses on both sides of the border which suffer most. Boasting a vast potential of revenue, a healthy demographic make-up, and low debt, The Islamic Republic of Iran is seen as one of the most lucrative among the emerging markets in the past few decades. But, as all emerging markets are fraught with ambiguity, Iran is no exception. Even with all its potential, years of international sanctions which were imposed as early as 1979 have pushed the country with the second largest gas and fourth largest oil reserves in the world towards a much diminished role. All this has changed after most of the international sanctions against the country were lifted as the result of a landmark nuclear deal. This means that the country will once again be able to trade freely with the rest of the world.
Although some sanctions still remain, the recent agreement is a major step in the right direction, and will help bring Iran back into the fold of the global economy. With the ink barely dry, countries such as China, Russia, France and Germany have shown their interest in investing in Iran with more countries expected to follow.
The major sectors that will be affected by this initial phase of sanctions relief
Iran’s $400 billion economy is the second-largest in the Middle East, which is a major attraction for investors who are experiencing slow growth at home. In terms of Iran’s economic landscape after the deal, a major question to address would be: which sectors are likely to witness foreign investment? The following will most probably be the sectors that will be affected by the lifting of the sanctions;
- Transportation
- Oil, Gas and Petrochemicals
- Financial, Banking and Insurance
- Tourism
- Energy Sector
It is no secret that foreign firms have been eager to exploit the potential of Iran's long-isolated economy. Initial foreign investment of around US $25 billion is targeted in order to update its aging oil and gas infrastructure. The good news is that Iran now has access to the $55 billion that was once tied up by sanctions.
Transportation
Transportation is another major industry that will benefit from the lifting of sanctions. Boeing Co.,the American manufacturer, should see a considerable increase in revenue as the county needs to replace at least 400 of its commercial airplanes within the next decade. Car manufacturers are also expected to benefit from the large Iranian market, especially car manufacturers such as Peugeot, which had to pull out of Iran in 2012 its second largest market. The company is currently in negotiations to resume its business as a joint venture in Iran.
Oil, gas and petrochemicals
Iran’s current crude oil production stands at around 2.85 MMbo/d but, as revealed by the Minister of Petroleum, Bijan Zangeneh, back in September of 2015 the country was aiming to increase its output to around 4.2 MMbo/d. According to more conservative estimates, an increase in production of around 600,000 bo/d and 1 MMbo/d is expected within six months since the auctioning of over 50 oil and gas projects and around 18 E&P blocks are expected within the next six months. According to reports, the licensing round will also include onshore and offshore, along with early and late stage projects.
India, China, Turkey, South Korea and Japan are likely to increase their oil purchases by the end of the year, while oil corporations from Western and European countries will also make efforts to increase their presence in Iran’s oil and gas market. Here are the seven oil companies that Iran wants working on its vast oil and gas field:
- Total SA of France
- Royal Dutch Shell
- Italy's ENI
- Norway's Statoil
- Britain's BP Plc
- Exxon Mobil Corp.
- ConocoPhillips Co.
Iran holds approximately 9.5% of world’s known recoverable oil reserves; its recent production had dropped off to 2.8 million barrels per day (September 2015) compared to 3.7 million per day pre-sanction days (in 2011); potential to expand its oil output to 5 million barrels per day by 2020.
Financial, banking and insurance
It is expected that the financial industry is going to benefit from the lifting of sanctions which have prohibited all international banks from using SWIFT, which is a global payments system that is used to carry out business with Iranian banks. Iran’s re-admittance to the SWIFT system will likely lead to many new opportunities for financial, banking and insurance institutions. Since financial transactions have a direct effect on all other industries, international companies will enjoy more significant business opportunities thanks to the global payment system.
Over the past ten years, banks have had to pay around $14bn in fines along with out-of-court settlements for violating those sanctions. But, according to experts, after the recent developments, Iran’s $90 billion stock market could possibly attract over a billion dollars in investments over the next six months. But, at the end of the day, it’s all going to depend on whether the US Treasury gives the green light to British and German business leaders so that they are confident in handling the Iran-related requests of their clients.
Tourism
Although the tourism infrastructure remains woefully underdeveloped, the lifting of the sanctions against Iran is likely to make the carrying out of trips to the country a lot easier for westerners. All of the mainstream online reservation platforms do not work and foreigners who want to visit Iran have to go through complicated procedures involving third parties in other countries if they want to use their credit cards to pay for services or souvenirs while in Iran. The frustrating situation has kept Iran on the no-go list of many travelers and holiday makers, but now, Iran’s tourism industry looks all set to grow. The country’s tourism industry that has been crippled because of the sanctions now hopes to welcome around 20 million tourists by the year 2025.
Accor Hotels, which is one of the leading hotel groups in the world have confirmed that they are linked to two four-star hotels in Tehran, while Rotana Hotels Group is going to open four hotels in Iran as well. Iran is also looking to develop the country’s skiing and mountaineering resorts, ancient sites and historical landmarks in an attempt to win over foreign tourists. For now, the rich history of a country twice the size of Texas awaits intrepid tourists.
Energy sector
It is safe to say that Iran has the potential to become the world’s energy superpower, which isn’t that farfetched when you think about it since Iran has the largest natural gas reserves in the world. The country is working to increase its production and improve its efficiency, which could one day allow Iran to become a natural gas exporter. Furthermore, the re-opening of Iran’s energy sector after the lifting of the sanctions will also offer many new opportunities for the IOCs, which will do wonders for the economy.
The grey area
The US is also planning to lift its secondary sanctions which apply to non-US companies and individuals, but the primary sanctions will still keep US citizens from engaging in any kind of trade with Iran. This raises the important question, “what about non-US subsidiaries of US companies?” And while the literature on the recent nuclear deal mentions that businesses with Iran will be allowed for subsidiaries of US companies, the statement itself contradicts the primary sanctions by the US.
The lifting of the sanctions from Iran means that around 300 Iranian owned businesses are now off the EU sanctions list, which means that they are no more blacklisted and can now do business with the US, EU and the rest of the world. According to some experts, with the sanctions gone, the country could boost its GDP up to 5% by next year, which is a big leap from where it is now at almost 0%.
Will Iran feel the Bern?
So, now let’s consider the hypothetical, “What if Bernie Sanders became president of the United States?” While there is no crystal ball we can peak into to tell us what a Sanders presidency would look like, Sanders has called for a “normalization” of relations with Iran. Overall, the difference of opinions between Sanders and Clinton on this issue is slight if any at all.
Bottom line
According to reports by Reuters Iran has a population of almost 80 million people and an annual output of around $400 billion, which will make it the largest economy to re-join the global financial and trade system since Russia over two decades ago. It is no wonder that businesses around the world are tripping over themselves to get their piece of the pie. Also, lifting the sanctions allows Iran’s some 32,000 high net worth individuals (HNWIs) to begin spending again. This means areas in the US and the UK with high Iranian populations will also likely benefit from new cash flows. In a bid to strengthen its bilateral relations with Iran, a string of joint projects has been announced by foreign investors. Countries such as, the UK, Austria, Nicaragua, Switzerland, France, Latvia, Azerbaijan, Belarus, Greece, Tajikistan, Spain, Poland and many other countries have all expressed their interest in investing in Iran. Even the EU’s top foreign policy official has pledged to get large regional banks to work with Iran after the lifting of the sanctions. More than two dozen delegations have visited Iran since the nuclear agreement was implemented on Saturday, 16th January. And more delegations from around the world are expected to visit the country in the coming months.
First published on LinkedIn on 28 April 2016. Read the original