Robert Powell Iran Special.Indd
Total Page:16
File Type:pdf, Size:1020Kb
All that glitters Assessing opportunities and risks in post- sanctions Iran A report by The Economist Intelligence Unit All that glitters Assessing opportunities and risks in post-sanctions Iran Contents Introduction 2 Background 3 Economy 6 Sectoral analysis 8 Business environment 18 © The Economist Intelligence Unit Limited 2016 1 All that glitters Assessing opportunities and risks in post-sanctions Iran Introduction January 16th 2016 will forever be viewed as a watershed for Iran. On that day, the International Atomic Energy Agency (IAEA) judged that Iran was fully compliant with its internationally agreed nuclear obligations—a ruling that in effect restored the Islamic Republic to the global community of nations and removed a mass of international sanctions that had been piled on the country since 2006. Keen to make up for lost time, Iran’s president, Hassan Rowhani, has been urgently seeking to drum up new business. On January 23rd he hosted a summit for China’s president, Xi Jinping, in Tehran, at which the two sides agreed to boost bilateral trade to US$600bn within a decade. This was swiftly followed by a trip to Italy and France, where some €50bn (US$55bn) in contracts were signed. However, even with Iran’s doors thrown open, it would be wise for businesses to keep in mind the ancient Persian proverb: “He who wants a rose must respect the thorn”. Iran’s economy is unusual among the region’s oil exporters; it boasts the largest natural gas reserves in the world and the fourth-biggest oil reserves, and yet it has a diversified economy (including a significant manufacturing sector), all backed up by a large, youthful, well-educated and welcoming population. But the business climate is less welcoming. Vested interests still permeate almost every aspect of the economy, typically operate outside the parameters of international commercial law—especially those businesses connected to the Islamic Revolutionary Guards Corps—and will jealously guard the gains they accrued during a decade of sanctions. And the finger of blame for Iran’s tricky operating environment should not be pointed solely at Iran; an array of residual US sanctions can snare the more unwitting investor, and Iran’s economic momentum is still too dependent on the vagaries of the global oil market. In this white paper The Economist Intelligence Unit will sketch out an economic road map of Iran’s future, outlining the most promising economic sectors within the world’s most exciting emerging market, but also detailing the country’s regulatory impediments to business. We will also provide lessons from the past, and reveal where Iran sits among the world’s major economies in our business environment rankings. 2 © The Economist Intelligence Unit Limited 2016 All that glitters Assessing opportunities and risks in post-sanctions Iran Background ince 1979 Iran’s economy has been buffeted by the chaos of the post-revolutionary environment Sand the demands of the eight-year war with Iraq (1980-88), and more recently by international isolation, fluctuating oil prices, sanctions and a fierce power struggle within the country’s political institutions. As a result, economic policymaking has been haphazard for much of the post- revolutionary period; no consistent strategy towards economic development has been pursued, and the commitments of successive five-year plans to support market-oriented reforms, boost the role of the private sector and diversify the economy away from its reliance on oil exports have not been honoured. Iranian real GDP growth (at factor cost) (%) 16 16 12 12 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 1982 84 86 88 90 92 94 96 98 2000 02 04 06 08 10 12 14 Source: The Economist Intelligence Unit. Ahmadinejad squanders his inheritance The country’s first concerted economic liberalisation drive and global outreach effort occurred during the presidency of Mohammed Khatami (1997-2005), during which time Iran used windfall oil revenue to pay down most of its rescheduled foreign debt, abolished the country’s multi-tiered exchange © The Economist Intelligence Unit Limited 2016 3 All that glitters Assessing opportunities and risks in post-sanctions Iran rate, relaxed import restrictions, launched a conservative privatisation drive and established an oil stabilisation fund (OSF). However, all the gains that were made during these years were largely squandered during the presidency of Mahmoud Ahmadinejad (2005-13), whose highly divisive presidency saw huge cash pay-outs and massive social housing programmes directed at the country’s poor, but also rocketing inflation, a collapse of the exchange rate and the depletion of the country’s OSF. It was also during his presidency that Iran’s efforts to establish a civil nuclear programme with international acquiescence were abandoned and a more nationalistic and confrontational approach to the nuclear issue was adopted. The consequent swathe of international sanctions led to the halving of Iran’s oil exports and the country’s financial sector being almost entirely cut off from the rest of the world. Not surprisingly, amid the tanking economy, the public yearned for change—culminating in the thumping presidential election victory for a moderate cleric, Hassan Rowhani, in the 2013 presidential election on a simple promise of diplomacy, dialogue and, ultimately, the ending of sanctions. Rowhani finds a receptive audience in the White House With a receptive audience in the shape of the US president, Barack Obama, talks made rapid progress, and an interim agreement was signed in November 2013 that provided for a halting of new sanctions and the release to Iran of over US$4bn in frozen funds. However, the short-term boost this provided to the economy soon dissipated as oil prices began their long downward lurch from September 2014, causing the Iranian delegation to redouble its efforts to reach a final deal. Eventually, after numerous postponements, on July 14th 2015 a final agreement was reached, the Joint Comprehensive Plan of Action (JCPOA). The JCPOA immediately provoked outcries from hardliners on all sides, with Iranian conservatives decrying the neutering of the country’s nuclear programme and the perceived violation of Iran’s sovereignty; in the West, meanwhile, Republicans in the US banded with Israel to denounce the deal as being too favourable to Iran, arguing that Iran could not be trusted to keep its side of the deal. Yet despite the scepticism, on January 16th the IAEA confirmed that Iran had implemented its commitments, including the shipment of 11 tonnes of Iran’s enriched uranium to Russia in late December, followed in early January by the redesign of its Arak heavy-water reactor. With the onset of “Implementation Day”, the sanctions that had hobbled the economy for a decade were finally lifted. 4 © The Economist Intelligence Unit Limited 2016 All that glitters Assessing opportunities and risks in post-sanctions Iran Timeline of sanctions freezes the assets of the Islamic Revolutionary Guards Corps and Islamic Republic of Iran Shipping Lines, recommends that states inspect Iranian cargo and August 2006 imposes financial restrictions on individuals and The UN Security Council passes Resolution 1696, entities connected with Iran’s nuclear and missile which threatens economic sanctions against Iran, programmes. after the Islamic Republic fails to respond definitively January 2012 to a compromise from the P5+1 (the five permanent The EU introduces a phased ban on imports of Iranian members of the Security Council plus Germany) oil, and, under pressure from the US, several Asian allowing it to conduct part of the nuclear fuel cycle countries agree to reduce their imports of Iranian in-country, in return for re-suspending uranium crude. Subsequently, Iran is cut off from the Society enrichment. for Worldwide Interbank Financial Telecommunication December 2006 network. The Security Council passes Resolution 1737 November 2013 introducing limited sanctions. Iran and the P5+1 agree to the Joint Plan of Action, March 2007 allowing for a partial freezing of Iran’s nuclear A second round of sanctions is agreed by the Security programme in return for an easing of sanctions on Council following a unanimous vote in support of Iran’s automotive and air sectors and the unfreezing Resolution 1747, which seeks to block Iranian arms of funds held abroad. exports and to tighten sanctions against Iran’s July 2015 nuclear industry. The Joint Comprehensive Plan of Action (JCPOA) is March 2008 signed between Iran and the P5+1. Iran agrees to The Security Council passes Resolution 1803, which limit the capacity of its nuclear programme, meeting includes an outright travel ban on Iranian officials US demands for a minimum “breakout time”—the engaged in Iran’s nuclear and missile programmes. time it would take Iran to produce enough weapons- September 2009 grade uranium for a single nuclear weapon—of a year The US president, Barack Obama, reveals that Iran or more and a tighter inspection regime by the IAEA. has been building a nuclear facility in the side of a In return, all nuclear-related sanctions will be lifted, mountain in Qom. Iran counters that it had informed once Iran abides by its requirements. the International Atomic Energy Agency (IAEA) of the January 2016 plant a week before. “Implementation Day”. The IAEA confirms that June 2010 Iran has met its obligations under the JCPOA and The Security Council passes Resolution 1929, which sanctions are lifted. © The Economist Intelligence Unit Limited 2016 5 All that glitters Assessing opportunities and risks in post-sanctions Iran Economy Real GDP growth After five years of sanctions-driven stagnation—during which the Iranian economy shrank by an aggregate 4%—The Economist Intelligence Unit expects Iran to witness a major turnaround in 2016- 20, as the lifting of nuclear-related US and EU sanctions propels the country to the top of the regional growth rankings.