Economic Trends: August - October

November 6, 2016
By
Nicholas Cappuccino

From August through October, Iran took additional steps toward reintegration with the world economy. It courted foreign investors in various sectors of its economy, such as energy, mining, and automobile production. The modest influx of cash back into the Iranian market and anticipation of more investment have reinvigorated some industries.

Yet the Middle East’s second largest economy still faces a number of challenges, such as persistent unemployment. Low oil prices have also dampened the positive impact that the nuclear deal and subsequent sanctions relief have had on the economy. Foreign interest in Iran's market has yet to have a significant impact on the economy. 

 

Oil & Gas

At a series of informal OPEC meetings held in Algiers, representatives from Saudi Arabia tried to broker a deal with Iran which stipulated that it would reduce its own production if Iran were to freeze its current output levels. Ultimately, Iran did agree to the deal, which was part of a greater OPEC scheme to stabilize the world oil market.

 

For the most part, Iran has not encountered the same level of economic hardships that other oil-based economies have as a result of the low price of crude oil. Currently, Iran produces 3.6 million barrels per day, though it remains committed to reaching 4.2 million barrels per day. In the long term, Iran is looking to increase production by 20 percent to 5 million barrels per day by 2021.

As part of the plan to increase long-term production capacity, Iran plans to get rid of the “buy back” contract model, which has been an obstacle to foreign investment. Rouhani’s administration has released a new “Iran petroleum contract” model as a means of better facilitating foreign investment. It will allow joint venture partnerships between foreign and Iranian oil companies, allow longer contract periods, and generally allow foreign companies to play a greater role in projects than they did with the buy back model.

Due to the sharp drop in oil and gas prices, Iran’s long-term goal of accessing European markets via newly constructed pipelines has been put on hold. Subsequently, the National Iranian Gas Exports Company has devised a new plan has been devised which would involve using preexisting pipelines to transfer natural gas from the South Pars field into Europe.

In October, Iranian officials in the oil industry vocalized their desire for Saudi Arabia and OPEC countries and Russia and non-OPEC to cooperate on reducing oil production to stabilize the world market. "I hope the two sides can reach an understanding, ... that and Russia and non-OPEC countries will reach an understanding over the decision by OPEC members to decrease oil production," Iran’s oil minister Bijan Zanganeh said. Iran also joined Venezuela and Iraq recently in openly criticizing OPEC’s official data on its members’ oil output. The three countries contest that OPEC is not citing reliable sources, rather using news media. Calculating, let alone agreeing on, the appropriate amount for production is even more difficult when members dispute the data.

 

Royal Dutch shell and Iran’s national petrochemical company signed a memorandum of understanding on October 9, laying the foundations for future cooperation. Iran’s deputy oil minister and CEO of the national petrochemical company said that by 2025 Iran wants to increase its entire petrochemical output from 60 million to 160 million tons, likely with the help of joint ventures like the one that is being planned with Dutch Shell.

 

Aviation

On September 21, the United States approved the sale of Western-manufactured airplanes, particularly from Boeing and Airbus, to Iran. The U.S. Treasury Department spent “spent months scrutinizing the deal to see what technology will be used on the planes, and whether anyone remaining on a U.S. sanctions list is involved in the deal,” according to NPR’s Jackie Northam. Many posit that the airplanes’ sale and transfer could also facilitate a greater influx of Americans and other Westerners into Iran, opening the door to deeper business ties down the road. This sale, not yet finalized, would mark the first time in nearly 40 years that Western manufacturers will be able to sell aircraft to Iran, due to sanctions imposed after the 1979 Islamic Revolution.

 

In the Boeing deal alone, 109 aircraft in all will be transferred to Iran, 80 of which will be newly built and 29 obtained from companies already in possession of them, amounting to a sale of over $17 billion. Despite the Treasury Department’s issuance of licenses to companies to sell airplanes to Iran, many U.S. lawmakers still oppose the deal. They are concerned that the influx of new hardware could allow Iran Air to use passenger and cargo planes to transport weapons to Syria to help the Assad regime or others in the region. Revolutionary Guards also took control of some flights. Washington imposed sanctions on Iran Air in 2011 for that reason, but the measures were lifted after the nuclear deal was signed in July 2015. In March 2016, the Treasury Department sanctioned another Iranian airline, Mahan Air, for similar reasons.

In mid October, Iran proposed deals with both Boeing and Airbus, which would grant it the right to maintain, repair, and manufacture rights for the airplanes domestically.

 

Automobiles

On September 30, French car manufacturer Renault announced a new joint venture with Iran. This would include the construction of new facilities with the ultimate goal of raising the company’s production capacity from 200,000 to 350,000. The partnership comes largely as a result of the ending of sanctions imposed on Iran, as well as the country’s rapidly expanding car market. Renault sales in 2015 alone increased by 56 percent to 51,500 cars. By 2018, the company plans to release its new Symbol and Duster models onto the Iranian market. The Renault-Nissan group is the world’s fourth-largest automobile group. It sold some 8.5 million vehicles worldwide in 2015.

 

Another French manufacturer, Peugot, is seeking to reclaim its former status in the Iranian market as the top seller. The company is looking to sell 150,000 cars in Iran in the second half of 2016, and 300,000 in all in 2017. In early October, top officials at Peugot said that they plan for Iran to be the top supplier of their cars in the Middle East and North Africa. Additionally, the company wants to make Iran a manufacturing hub for its cars as well, as part of its manufacturing plan to supply 1 million cars to the Middle East and North Africa by 2025.

 

Steel and Mining

Iranian steel exports have risen by 51 percent in the last year, going from 1.52 million tons to 2.31 million according to Iranian media. According to the World Steel Organization, Iran sits at number 14 on the list of the world’s top steel producers, however it often shifts between places 13 and 14.

 

Iran has been rapidly expanding its mining and mineral industry, part of which includes the building of the Kahnuj titanium production plant, which will make the country one of the few capable of producing titanium. Due to its rarity, corrosion resistance, and resilience, titanium has become increasingly important and sought after in aircraft manufacturing and military hardware. The plan is estimated to cost $161 million dollars to implement.   

Iran also plans to heavily develop its mining industry, which currently only accounts for less than one percent of its gross domestic product (GDP) despite having seven percent of the world’s proven mineral reserves. Iran plans for a $29 billion investment in order to facilitate its mineral industry’s expansion, much of which comes from foreign investors in China, Italy, and France.

 

Sanctions

On September 29, American media outlets revealed that in January 2016, the Obama administration allowed the lifting of U.N. sanctions on two Iranian banks (Bank Sepah and Bank Sepah International) responsible for financing the Iranian ballistic missile program. The move has faced scrutiny from critics of the recent détente between the United States and Iran, as they see it as one more step toward Tehran’s ability to develop delivery systems for a hypothetical nuclear warhead or other weapons of mass destruction. However, the Obama administration has maintained its close vetting of the banks’ activities to ensure that they remain above board.

In mid-October, the U.S. Treasury Department announced that it would further loosen sanctions on certain entities in order to incentivize foreign business to invest in Iran. This is intended to allow investors to conduct business with Iranian companies and peoples with American dollars, with the specific provision that that money doesn’t come back to the U.S. financial system. 

 

Credit Cards

On September 25, Iranian banks began issuing credit cards for the first time since 1979. The cards will be linked into Iran’s Shetab banking system and will only be for domestic use and will not have any sort of partnership with larger foreign companies like Visa and Mastercard. 

 

Kurdistan, Unemployment

President Rouhani reportedly sent a delegation to the Kurdistan’s provincial capital Sanandaj to build support ahead of the June 2017 presidential election. The delegation met with social and political activists in the provincial capital. “The infrastructure in Sanandaj has not seen any development and the government has failed to make use of local expertise and labor,” Ahsan Alawi, the city’s representative in Parliament, told Rudaw

In 2013, Rouhani campaigned on a platform that called for increased involvement of ethnic minorities in government and permission for minorities to teach their native languages. But ethnic minorities still face challenges. Areas in Iran with large Kurdish populations reportedly suffer from economic neglect and higher rates of unemployment than the rest of the country. A September 2016 U.N. report on the state of human rights in Iran found that ethnic minorities, including the Kurds, are still disadvantaged. “Ethnic minority groups, including Arabs, Azeris, Baluch and Kurds, face discrimination in gaining access to university studies, employment, business licences and economic aid, getting permission to publish books and exercising their civil and political rights,” according to the secretary general’s report. In May 2016, however, the government announced that it would develop two petrochemical plants in Kurdish areas. 

Many have tied the increased unrest in Iran’s Kurdish regions in part to the reportedly high rate of unemployment among young males. Nationally, unemployment has fluctuated between 9.5 and 11.8 percent since 2013. The Statistical Centre of Iran reported that unemployment stood at 11 percent in March 2016, 0.4 percent higher than the previous Iranian calendar year. It reported that some 2.7 million people were jobless, but in June 2016, Parliament’s research center estimated that the number of unemployed, underemployed and those who gave up on the job search totaled 6.5 million, suggesting a more widespread problem. In May 2016, Rouhani announced a goal to create 1 million jobs annually. 

 

Nicholas Cappuccino is a research assistant at the Woodrow Wilson International Center for Scholars. 

 

By
Nicholas Cappuccino