Economic Trends: August and September

October 5, 2015

Cameron Glenn

In August and September, Iran’s leaders tried to manage high expectations that the final nuclear deal will carry immediate economic benefits. The deal’s “Implementation Day,” when certain U.S., E.U., and U.N. sanctions will be lifted, will likely not occur until mid-2016. Additionally, the Islamic Republic may experience a severe budget deficit this fiscal year, as oil prices remained low around $45 per barrel. And several key non-oil industries – including automotive, steel, and cement production – are struggling from low demand and regional competition.
 
But European firms, many of which have been barred from doing business with Iran by sanctions, have continued to scope out investment and trade opportunities in Iran. In August and September, Tehran hosted a flurry of foreign trade delegations and signed several new contracts to boost foreign cooperation in energy, transportation, and other key sectors. Austrian President Heinz Fischer became the first European head of state to visit Iran since 2004. Austria and Iran hope to triple bilateral trade by 2020.
 
The following is a rundown of top economic stories with links.
 
Domestic
 
Outlook
 
Around 57 percent of Iranians think economic conditions are improving, according to an August 2015 poll by the Center for International and Security Studies at Maryland. The figure is up from 32 percent in a May 2014 Gallup poll.
 
A plurality of Iranians, around 36 percent, believe that it will take about a year for Iran to see tangible changes in unemployment, living standards, foreign investments, and access to foreign medicines and medical equipment as a result of the nuclear deal.
 
On September 12, First Vice President Es’haq Jahangiri blamed high expectations for oversupply and low demand in several Iranian industries. “Unfortunately, some people are expecting a sudden fall in prices after the implementation of the nuclear agreement,” he said.
 
Oil
 
Iran hopes to lure back foreign oil companies by offering more favorable contract terms. In August, Oil Minister Bijan Zanganeh announced that Iran will introduce the Iran Petroleum Contract (IPC) as early as October. Unlike the “buy-back” contracts unpopular with foreign firms, the IPC allows companies to participate in all the stages of an oil or gas field’s lifecycle.
 
Foreign oil companies have sought opportunities to resume work in Iran since the nuclear deal was signed in July. Italian oil company ENI, for example, sent executives to Iran in August as part of a high-ranking business delegation. ENI had been active in Iran before sanctions were tightened in 2010.

 

 

At the same time, Iranian officials emphasized reducing Iran’s dependence on oil. “The oil market, in which prices drop from $100 to $40 in a blink of an eye, is not reliable at all,” Supreme Leader Khamenei said in a meeting with Rouhani and cabinet members on August 25. “We have to consider finding a suitable alternative.”
 
In September, government spokesman Mohammad Bagher Nobakht said Iran may reduce oil revenues to only 30 percent of the state budget. Oil revenues have typically accounted for around 60 percent, but last year Tehran was forced to revise budget estimates after oil prices dropped in late 2014. Nobakht said that the fluctuations could cause the government to receive 22 percent less revenues this year than anticipated, causing the largest budget deficit since the Iran-Iraq war.
 
“The Iranian economy is based on a single product, a problem which has not been completely resolved yet,” Rouhani said in September. Iran hopes to reach $77.5 billion in non-oil exports in 2015.
 
Gas
 
In September, Oil Minister Bijan Zanganeh met with officials from Poland and Spain to discuss the possibility of exporting liquefied natural gas to the two countries. European companies estimated that Iran – which holds the world’s second largest natural gas reserves – could supply Europe with up to 35 billion cubic meters of gas per year by 2030.
 
But Iran faces significant roadblocks, including a lack of infrastructure, the need for billions of dollars of investments, competition from other producers, and an excess of natural gas on the market. Alireza Kameli, managing director of the National Iranian Gas Export Company, said that exporting gas to Europe may not prove to be economical, and that the Islamic Republic should focus on exporting gas to its neighbors. In August and September, Iran also reached agreements to expand natural gas exports to Oman and Iraq.
 
Auto industry
 
In August, a social media campaign in Iran began calling for a boycott of Iranian-made cars due to poor quality and safety standards. In September, Minister of Trade, Mining, and Industry Mohammad Reza Nematzadeh called the boycott “sinful” and “anti-revolutionary,” arguing it would hurt the economy.
 
Iranian car production rose 8.7 percent in the first five months of the Iranian calendar year (March-August 2015), but sales of Iranian cars dropped 15 percent in the same period.
 
The automotive industry is Iran’s largest non-oil sector. Western automakers left Iran due to sanctions, but several companies – including Fiat Chrysler, Volkswagen, Mercedes-Benz, and Peugeot – have expressed interest in returning to Iran once sanctions are lifted.
 
 
Cement
 
Iranian cement exports – a key non-oil industry – declined by 30 percent in the first five months of the Iranian calendar year. Iran is the largest cement producer in the Middle East, but it has struggled in the past few years from low demand, sanctions, and competition from other cement producers such as Turkey.
 
Steel
 
Iran’s steel output grew 60 percent between 2007 and 2014, according to the World Steel Association. Iran imported billions of dollars in steel in the early 2000s, but increased domestic production after sanctions restricted imports. Iranian officials hope that lifting sanctions will allow it to increase steel exports to 10 million tons by 2025.
 
But Iran’s steel industry is also struggling due to low demand, high production costs, and competition from low-quality steel products from China. It has also been hampered by the recent decline in car sales.
 
Water and electricity
 
Iran hopes to earn $50 billion in investments for water and electricity projects once sanctions are lifted, according to Energy Minister Hamid Chitchian. The projects would take around 20 years to complete. The water and electricity sectors have suffered from lack of investment over the last few years and uneven implementation of President Mahmoud Ahmadinejad’s subsidy reform program.
 
International
 
United Kingdom
 
Central Bank of Iran Governor Valiollah Seif announced that two Iranian banks will open in Britain. Seif met with British Foreign Secretary Philip Hammond in August, during his visit to Tehran to reopen the British embassy. A British economic delegation, which included oil and gas companies, visited Iran in early October.

 

 
European Union
 
Iran’s exports to the European Union increased 14 percent in the first half of 2015 compared to the same period last year, according to the E.U. statistics office. Imports from Iran totaled 550 million euros, compared to 480 million euros in the first half of 2014. Masoud Khansari, president of the Tehran Chamber of Commerce, said in September that eight major European trade delegations have visited Iran since the nuclear deal was signed, and the Islamic Republic plans to host at least 10 more in the near future.
 
United States
 
Iran plans to resume carpet exports to the United States once sanctions are lifted under the nuclear deal, according to Hamid Kargar, head of Iran’s National Carpet Center. Before sanctions were tightened in 2010, the Islamic Republic exported $80 million in carpets to the United States annually, and the U.S. market accounted for one fifth of Iran’s carpet exports.
 
Austria
 
Austrian firms signed contracts and memoranda of understanding with Iran totaling $89 million during Austrian President Heinz Fischer’s visit to Tehran in September. Fischer was the first European head of state to visit the Islamic Republic since 2004. Iran and Austria hope to increase bilateral trade from $300 million per year to $1 billion per year by 2020.

Turkey
 
Trade between Turkey and Iran declined by 21.8 percent in the first seven months of 2015, compared to the same period last year. Turkey’s exports to Iran rose 22.1 percent, but imports dropped by 34.8 percent, due in part to falling oil prices. The two countries have sought to increase trade volume in 2015, signing a series of bilateral trade agreements earlier this year.
 

 

Other countries
 

In August and September, Iran also took steps to improve bilateral economic ties with several other nations. They included the following:

  • Iraq signed three deals on economic cooperation with Iran.
  • France opened a trade office in Tehran during a visit from a business delegation with representatives from Airbus, Renault, Peugeot, and Total.
  • Mexico signed a memorandum of understanding on labor cooperation with Iran.
  • South Korea’s export credit agency announced it would help finance $5 billion worth of projects by Korean firms in Iran.
  • Italy’s development ministry and export credit agency signed a memorandum of understanding "to facilitate future economic and commercial relations” with Iran.
  • South Africa – formerly the leading African importer of Iranian oil – signed a deal to increase oil imports from Iran once sanctions are lifted.
  • Officials in Bangladesh and China met with Foreign Minister Mohammad Javad Zarif to discuss improving trade ties.
  • A Spanish delegation visited Tehran to pursue cooperation in tourism, transportation, and energy.
  • Armenia negotiated a series of deals with Iran in railroads, gas, and electricity to implement once sanctions are lifted.
  • Serbian agricultural ministers hosted their counterparts from Iran and discussed opportunities for collaboration.

 

Cameron Glenn is a senior program assistant at the U.S. Institute of Peace.