Economic Trends: Month of May

May 28, 2015

Cameron Glenn

In May 2015, Iran continued to explore expanding trade ties with the international community, in anticipation of a nuclear deal that could lift international sanctions. On May 25, Tehran Stock Exchange CEO Hassan Qalibaf-Asl met with a group of international investment managers and said “A new global attitude toward the economic and investment environment in Iran is taking shape.” Russia, India, Oman, and Syria all took steps to expand cooperation with Iran in trade, energy, and infrastructure. Iranian officials even called for forming “unofficial connections” with American trade partners that could be expanded in a post-sanctions environment.

Domestically, President Hassan Rouhani’s administration has been pushing for economic reforms, particularly reducing the monthly cash handouts that all Iranians are eligible to receive. Officials also reduced fuel subsidies and raised the price of gasoline by 40 percent, bringing the cost to 10,000 rials per liter (around $1.28 per gallon). Despite the pressure from international sanctions, Rouhani’s economic reforms have yielded modest progress – by the end of May, inflation had dropped to 14.3 percent.
 
The following is a run-down of the top economic stories with links.
 
Domestic Developments
 
Cash Handouts: Minister of Labor and Social Welfare Ali Rabii said on May 19 that Iran can no longer afford the cash handouts established by President Hassan Rouhani’s successor, Mahmoud Ahmadinejad. In 2010, Ahmadinejad began phasing out food and energy subsidies and replacing them with monthly cash handouts. All Iranians are eligible to receive them, regardless of income, and only 2.4 million out of 80 million Iranians have opted out. The individual monthly payments are 455,000 rials (around $15). Rabii said the handouts were hindering domestic production and investment.
 
Rouhani’s administration is trying to restrict the handouts to only the poorest Iranians. Around $19.5 billion is required annually to fund the handouts, and Director of the Management and Planning Organization Mohammad Bagher Nobakht said, “we will have to eliminate a great number of people” from the payment list to reduce that cost and work within existing budget constraints.
 
Oil: Deputy Oil Minister Rokneddin Javadi said that the Organization of Petroleum Exporting Countries (OPEC) is unlikely to cut production to reduce oil prices, despite Iran’s repeated calls to reduce output. Javadi also estimated that Iran could increase oil exports to pre-sanctions levels of 2.5 million barrels per day within three to six months if sanctions are lifted. The largest buyers of Iranian crude oil – China, India, South Korea, Japan, and Turkey – recently extended their oil purchase contracts with Iran.
 
Iran also plans to increase daily exports of various oil products, not including gasoline, according to Managing Director of the National Iranian Oil Products Distribution Company Seyed Naser Sajjadi. “It is expected that about 12 million liters of gas oil and 40 million liters of fuel oil from the total surplus of the country’s oil products would be exported per day,” he said.
 
Natural Gas: On May 10, Mohsen Ghamsari, director for international affairs at the National Iranian Oil Company, said it was currently not “economically feasible” for Iran to start exporting natural gas to Europe. In April, the Iranian ambassador to Turkey, Alireza Bigdeli, had announced that Tehran was developing a project to export gas to Europe through Turkey. Natural gas prices increased by 15 percent on May 26 for household, commercial, and public sectors, according to National Iranian Gas Company Managing Director Hamidreza Araghi.
 
Gasoline: National Iranian Oil Products Distribution Company spokesman Davoud Arab-Ali announced on May 26 that the price for a liter of gasoline would increase from 7,000 rials to 10,000 rials. The price of premium gas was set at 12,000 rials. Officials are also considering eliminating fuel subsidies to unify gas and oil prices.
 
 
 
Domestic Production: Supreme Leader Ayatollah Ali Khamenei stressed the importance of domestic production in a speech on May 27.
 
Tourism: Iran is the most attractive tourist destination in the world in terms of price competitiveness, one of the 14 indicators in the World Economic Forum’s Travel & Tourism Competitiveness Index. Price competitiveness measures purchasing power parity, the cost of access to transportation and hotel services, and fuel price levels. The index also quantifies each country's enabling environment, travel and tourism policy, infrastructure, and natural and cultural resources to measure its attractiveness as a tourist destination. Iran ranks 97th out of 141 countries across all categories.
 
The number of French tourists to Iran is expected to double in 2015 from 150,000 to 300,000, according to a French embassy cultural advisor. The official noted that French tourists are flocking to Iran for its “many tourist and cultural attractions.”
 
Inflation: Iran’s inflation rate has dropped to 14.3 percent for the 12-month period ending May 21, according to Director of the Management and Planning Organization Mohammad Bagher Nobakht.
 
Aircraft production: Iran’s Minister of Roads and Urban Development Abbas Akhoundi said Iran plans to revamp its air fleet and commercial airlines. “The current situation of the air fleet is not becoming to the Iranian nation and the air fleet needs major investment,” he said on May 10. “We have conducted extensive negotiations with companies supplying planes … so that when sanctions are removed, contracts can be signed immediately.”
 
Iran also plans to purchase 400 new passenger planes in the next 10 years. Ali Reza Jahangirian, head of Iran’s Civil Aviation Organization, said Western companies have been eyeing Iran’s air industry. “We have gotten very positive signals from Western companies, including Boeing Co. and General Electric Co., about getting new spare parts for our planes,” he said.
 
International Developments
 
United States: On May 24, Head of the Chamber of Commerce, Industries, Mines and Agriculture Gholamreza Shafei said that “unofficial connections could pave the way for establishment of joint chambers of commerce between Iran and America.” Shafei has not yet officially met with an American business delegation, but noted that American businessmen have expressed interest in expanding trade relations with Iran. “They are especially showing interest as they see most Western countries are sending big trade delegations to Iran,” he said. “Trade ties with America are important for Iran’s exports because our traditional goods have a favorable market in that country.”
 
Separately, a delegation of Iranian traders, entrepreneurs, and artists visited the United States in mid-May. Hamid Hosseini, a member of the Tehran Chamber of Commerce, said the purpose of the visit was to “hold talks with American cultural institutes, universities, and trade sectors, and present Iran’s cultural and economic capacities and potential.”
 
Foreign investment: Tehran Stock Exchange CEO Hassan Qalibaf-Asl met with a group of investment managers from the United States, United Kingdom, Russia, Turkey, Egypt, Greece, Italy, and the United Arab Emirates on May 25. “A new global attitude toward the economic and investment environment in Iran is taking shape,” Qalibaf-Asl said.
 
Russia: On May 26, Russian officials announced that they will begin importing goods from six Iranian food companies, including four dairy producers and two poultry producers. Russia has taken steps to expand trade ties with Iran after facing escalating sanctions from Europe over the Ukraine crisis.
 
 
India: On May 6, Tehran and New Delhi signed a memorandum of understanding to develop the strategic Chabahar port in southeast Iran. President Rouhani said, “We welcome the presence of Indian investors in the development of Chabahar port and other southern ports, as well as the construction of roads and railroads.” Plans to develop the port date back to 2003, but were delayed by international sanctions on Iran. Following the April 2 announcement of a blueprint for a nuclear deal, India sent a delegation to Tehran to discuss potential trade, energy, and infrastructure cooperation. The port would allow India to be less dependent on land routes through Pakistan to trade with Afghanistan.

 
South Africa: On May 10, Foreign Minister Mohammad Javad Zarif met with his South African counterpart, Maite Nkoana-Mashabane, in Tehran. Zarif described Iran’s relationship with South Africa as “friendly and strategic” and noted the potential for economic cooperation in the oil and gas industry. Two days later, at the South Africa-Iran joint commission in Tehran, the South African minister spoke out against the international sanctions imposed on Iran. “Unlike others, South Africa is not waiting for sanctions to be lifted to do business with Iran,” she said, noting that bilateral trade has risen 50 percent over the past year.
 
Oman: On May 14, Iran established a new shipping route from Shahid Rajaee to the Omani port of Sohar, following an April agreement between Tehran and an Omani business delegation. The route will be used to transport agricultural products and other goods, expanding Iran’s access to regional trade.
 
In late May, Omani officials also requested Iran Khodro, a leading Iranian vehicle manufacturer, to produce cars in Oman. After oil and gas, automotive production is the second largest industry in Iran. “If the plan proves to be economically viable and necessary investment is made, Iran Khodro would like to establish a production site in Oman and supply regional markets,” said Iran Khodro’s CEO Hashem Yekke-Zare in a meeting with Hassan Ahmed al Nabhani, CEO of Oman Investment Fund.  
 
Germany: German Ambassador to Tehran Michael Freiherr von Ungern-Sternberg described Germany as “the biggest European partner of Iran in the field of the economy” during a meeting with Khorassan Razavi, governor general of Mashhad. Separately, German Foreign Ministry spokesman Martin Schaefer said that Germany would welcome a nuclear agreement between Iran and the world’s six major powers, allowing for greater energy and trade cooperation between Tehran and Berlin.
 
 
Syria: Tehran and Damascus have signed bilateral agreements for cooperation in electricity, industry, oil, and investment, according to Syria’s state news agency. Ali Akbar Velayati, a senior advisor to the Supreme Leader, also announced during a visit to Damascus that Iran would extend a new credit line to Syria.
 
Israel: The Eilat Ashkelon Pipeline Company has been ordered by a Swiss court to pay Iran $1.1 blllion in compensation over a business venture initiated before the 1979 Iranian Revolution. The Israeli company had agreed to partner with the National Iranian Oil Company to transport Iranian oil to Europe via Israel. But Tehran canceled the contract after the revolution, and claimed the Israeli company still owed $450 million in crude oil it received from Iran on credit. Israeli officials, however, say they do not plan to pay the debt. “According to the Trading with the Enemy Act it is forbidden to transfer money to the enemy, including the Iranian national oil company,” a Finance Ministry statement said.
 
Iraqi Kurdistan: Iran signed a contract to open a trade center in Erbil, with the purpose of facilitating trade with the semi-autonomous Kurdistan region in Iraq. Head of the Trade Promotion Organization of Iran Valiollah Afkhami Rad said the trade center would increase understanding of Iraqi markets and support Iranian industries looking to expand trade in Erbil.
 
 

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