Economic Trends: January 2016

The most significant development in January was the implementation of the nuclear deal, which awarded Iran partial relief from U.S., U.N., and E.U. sanctions. European and Asian companies quickly took steps to establish a foothold in the Middle East’s second largest economy.

 

Days after the deal was implemented, Iran engaged in a number of high-profile diplomatic visits. Chinese President Xi Jinping visited Iran on January 22 and 23 and signed 17 agreements. It was his first visit to the Islamic Republic. Two days later, President Hassan Rouhani embarked on his first trip to Europe. During the four-day visit, Iran inked deals worth $43 billion with French and Italian companies. China, Italy, and France were major trade partners with Iran before sanctions were tightened in 2010, and all are eager to boost economic ties.

 

Nonetheless, there may be limits to Iran’s economic windfall from sanctions relief. Some companies are more cautious to pursue business in the Islamic Republic, fearing they will run afoul of remaining U.S. sanctions for terrorism and human rights violations. Iran’s corruption and difficult business environment may also deter foreign investors. And as Iran prepares to ramp up oil and gas exports, it must contend with low oil prices and the need for billions of dollars of investments. The following is a rundown of major economic developments in Iran in January.

 

 

January 16 marked the nuclear deal’s Implementation Day. After the U.N. nuclear watchdog determined that Iran had fulfilled its commitments under the agreement, the Islamic Republic received long-awaited relief from economic sanctions that have crippled its economy. “Today is a historical and exceptional day in the political and economic history of the Iranian nation,” said President Hassan Rouhani. A U.N. arms embargo and ballistic missile restrictions on Iran will remain in place, as will non-nuclear U.S. sanctions.

 

Iran also gained access to billions of dollars on Implementation Day. The Islamic Republic holds at least $100 billion in frozen assets, but much of that amount is tied up in debts or other pre-existing obligations. As a result, Iran may receive closer to $55 billion, according to U.S. Secretary of State John Kerry and Treasury Secretary Jacob Lew. Iran’s central bank governor Valiollah Seif, however, claimed in January that only around $30 billion would be available to Iran immediately. After Implementation Day, Seif reported that Iran had transferred funds from some of its overseas assets in held banks in Japan and South Korea, though he did not specify how much.

 

Iran also regained access to the international financial system. SWIFT, a Belgian system used to transmit payments, reportedly began the process of restoring service to Iranian banks. But U.S.-based payment systems – including credit cards – will still not function in Iran.

 

 

On January 16, Rouhani said the nuclear deal "opened new windows for engagement with the world." He estimated that Iran needs $50 billion annually in foreign investments to reach its goal of eight percent growth. Central Bank Governor Valiollah Seif said on January 20 that the $50 billion figure “isn’t farfetched” and that investment could offset the impact of low oil prices. According to the president’s chief of staff Mohammad Nahavandian, “Iran may be one of the most promising emerging markets of the coming decades.”

 

Foreign companies have been flocking to Iran since before the nuclear deal was signed. More than 140 economic delegations from 48 countries visited Iran between March and December 2015, according to Mir-Abutorab Badri, an official with the Trade Promotion Organization of Iran. Around half of them were from Europe and North America.

 

In January, some companies quickly took steps to re-enter the Iranian market. Daimler, a large German manufacturer of commercial vehicles, reached preliminary agreements to produce and sell trucks in Iran. European firms including Airbus, Peugeot, Danieli, and Saipem signed deals during Rouhani’s trip to Italy and France.

 

Other firms, however, are concerned that investing in Iran could backfire in the event of “snapback” sanctions or policy changes under the next U.S. president. Foreign companies are restricted from trading with more than 200 Iranian entities still sanctioned by the United States for non-nuclear reasons. Corruption, lack of transparency, poor transportation infrastructure, and other issues in Iran’s business environment could also deter potential investors. Iran ranks 119^th out of 189 countries in the World Bank’s ease of doing business index, and 136^th out of 175 countries in Transparency International’s corruption perceptions index.

 

 

Iran’s economy could achieve five or six percent growth in the next Iranian calendar year, which begins in March, according to Central Bank Governor Valiollah Seif. In a January 11 speech, President Rouhani echoed Seif’s optimism. “Despite all difficulties this year, economic growth of the country will be positive and I assure the people of Iran that next year (1395) will be the year of economic growth,” he said. The International Monetary Fund predicts Iran’s economy will grow between four percent and 5.5 percent next year.
 

 

 

On January 17, Rouhani presented a draft budget of $75 billion to parliament. The budget was around 4.2 percent higher than the previous year, with the expectation that sanctions relief will boost the economy. Government spokesman Mohammad Bagher Nobakht noted that only 25 percent of Iran’s state budget will depend on oil revenues, compared to around 60 percent in the past few years.

 

 

On January 13, oil prices fell below $30 a barrel for the first time in 12 years. Oil Minister Bijan Zanganeh blamed the low prices on political motivations behind overproduction. “There is a political will behind OPEC indecision over the production ceiling in the organization,” he said.

 

Despite low prices, Iran plans to quickly increase oil production. After Implementation Day, Iranian officials ordered an increase in production of 500,000 barrels per day, which they hope to achieve within six months. They planned to increase output by 1 million barrels per day within a year.  “If Iran does not increase its oil production, neighboring countries may increase their production…and take Iran’s share,” said Rokneddin Javadi, head of Iran’s National Oil Company. 

 

 

In late January, Iran’s Bank Mellat set up accounts with European banks to collect billions of dollars of overdue oil payments. Iran signed deals with Russian oil company Lukoil, Greek oil refiner Hellenic Petroleum, Italian oil services company Saipem SpA, and Italian energy group Ansaldo Energia.

 

On January 30, a group of students protested outside the Iranian Oil Ministry against the new Iran Petroleum Contract (IPC), chanting that the contracts would lead to the “plundering of national wealth.” The Oil Ministry introduced the IPC to replace the old “buy-back” contracts unpopular with foreign firms. Amid the protests, the National Iranian Oil Company announced that it postponed an oil conference in London due to issues obtaining visas.

 

 

On January 11, President Rouhani attended the inauguration of phases 15 and 16 to develop the South Pars field, the largest gas field in the world. Iran plans to complete phases 17-21 of its 24-phase development plan within the next Iranian calendar year, according to Managing Director of the Pars Oil and Gas Company Ali Akbar Shabanpour.

 

Tehran hopes to increase gas exports and secure $40 billion in foreign investments now that sanctions are lifted. On January 19, Managing Director for International Relations of the National Iranian Gas Company Azizollah Ramezani said that Iran “is well-placed to sell gas to all countries,” including Europe.

 

Exporting natural gas requires expensive pipeline infrastructure or liquefaction – a process that liquefies natural gas and makes it easier to export. Building this infrastructure would cost billions of dollars and take years. On January 26, Managing Director of the National Iranian Gas Exports Company Alireza Kameli said that Iran was pursuing the development of liquefied natural gas (LNG) capabilities and hopes to be able to export LNG to Europe by 2018. Kameli also said in January that Iran was in the midst of negotiations to export gas to Oman and use its vacant LNG facilities.