Economic Trends

February 25, 2015

Garrett Nada

January and February

The most important developments in early 2015 were Iran’s reactions to low oil prices. The price of crude oil was still hovering around $60 a barrel in February, down from $115 in June 2014. In January, Iran’s government readjusted the new budget to assume an oil price of $40 a barrel, down from the $72 price included in the initial draft presented by President Hassan Rouhani to parliament in December. The previous year’s budget was based on the price of $100 per barrel. Also in February, lawmakers voted cut expected oil revenues in the draft budget by 25 percent to $18.5 billion to compensate for low prices.

But newly released statistics suggest that 2014 was still a relatively productive year for Iran. Oil and gas exports were up 39 and 41 percent, respectively, during the period from March 2014 to January 2015 compared to the same period last year. Inflation is down to less than 17 percent from 39 percent in January 2014. The auto industry, one of Iran’s most important economic sectors, saw a 60 percent rise in production. 
 
The following is a run-down of the top economic stories with links.
 
Domestic Developments
 
Growth: In a speech marking the 36th anniversary of Iran’s revolution, President Rouhani outlined the country’s economic progress. “Last year, I promised you that the economy will step out of recession. Today, I announce that the economy grew by 4 percent in the first six months of the current year,” he said on February 11. “The Industry, mine and trade sectors grew by 6.5 percent, 10.5 percent and 5.4 percent respectively in the first six months of the current year,” Rouhani added. He also noted that crude oil production increased from 2.7 to 2.9 million barrels a day.
 
Oil: Minister of Economic Affairs and Finance Ali Tayebnia said that the government is revising its draft budget to assume an oil price of $40 a barrel. The initial budget that President Rouhani presented to parliament was based on $72 a barrel, down from $100 in the 2014 budget.
 
In February, lawmakers voted to cut the amount of expected oil revenues in the draft budget by 25 percent to $18.5 billion to compensate for low oil prices. But they also earmarked an additional $5 billion to restructure the budget if prices rise again.
 
Exports fell 60 percent to 1 million barrels per day in early January, according to Oil Minister Bijan Namdar Zanganeh. But he did not specify the period. Zanganeh said that predicting the market’s behavior was impossible because “political motives and interventions” were creating fluctuations. Zanganeh declared that the fall of oil prices will not force Iran to change its positions or policies. “If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry,” he later claimed.
 
Iran’s petrochemical exports totaled some $12.8 billion from March 2014 to January 2015, a 39 percent increase compared to the same period last year, according to government spokesperson Mohammad Baqer Nobakht.
 
Iran launched the world’s largest floating oil export terminal on February 8. The unit, which can store some 2.2 million barrels, is more than 1,100 feet long and nearly 200 feet wide.
 
Gas: Gas production has hit its highest point since 1970, according to the National Iranian Gas Company’s planning manager. Production capacity, which usually increases between five to 10 billion cubic meters a year, is expected to increase by 22 billion cubic meters by March 21.
 
The export of gas condensates from March 2014 to January 2015 totaled some $12.1 billion, a 41 percent increase compared to the same period last year.
 
Inflation: The Central Bank of Iran announced that the annual inflation rate was at 16.3 percent based on price changes since March 2014. The bank, however, noted sharp price increases in the health, entertainment and transportation sectors.
 
Auto industry: Production of automobiles has increased by more than 60 percent between March 2014 and January 2015 compared to the same period last year. Iranian companies reportedly produced more than 930,000 vehicles. The auto industry has historically been Iran’s largest sector unrelated to petrochemicals. 
 
Stock market: The Tehran Stock Exchange’s Index hit 65,055 points in late January, down 15 percent since October 2014. In a panic over another fall in the index, sellers attempted to sell their shares en-masse. Some traders protested by smashing glass on the trading floor and demanding the resignation of the head of Tehran’s Securities and Exchange Organization.
 
Taxes: President Rouhani called on Revolutionary Guards-controlled companies and religious foundations to give up their tax-exempt status. “We are trying to tax everyone across the board, but as soon as we touch this or that institution, they make such a stink about it,” he said in a speech.
 
Diversification: President Rouhani warned that Iran needs more than oil revenues to run the country. “We should have a variety of revenue sources, we cannot depend on a single source of income, we should get united with our neighbors and [oil] producers to solve our problems,” he said while touring Bushehr Province.
 
Banks: Lawmakers passed a bill to raise the capital of state-owned banks by 100 trillion rials, or $2.85 billion during the next 10 years. The goal is to increase lending to the private sector.
 
Corruption: The Supreme Court sentenced Mohammad Reza Rahimi, a vice president who served under former President Mahmoud Ahmadinejad, to five years and three months in prison for corruption. Rahimi was ordered to pay a 10-billion-rial (about $369,000) fine.
 
Energy: Energy Minister Hamid Chitchian warned that electricity shortfalls are hindering economic growth. The sector “has consistently been weakened over the past five years, and investment has dramatically decreased,” he noted. Energy demands are reportedly growing at about six percent a year while growth is less than a third of that. The power network needs at least $4 billion dollars in investment, according to the energy ministry.
 
The first national conference on “Renewable Energy and Sustainable Development” was held at the University of Zabol in Sistan-Balochistan Province.
 
Steel: Iran was the largest producer of steel in the Middle East in 2014 and 14th largest in the world, according to the World Steel Association. Iran produced some 16.3 million tons of steel in 2014, a 5.9 percent rise from 2013.
 
Sanctions: On February 18, Supreme Leader Ayatollah Ali Khamenei urged Iranians to “resist sanctions” and not allow Western countries to place conditions on the country's nuclear program. In a public speech, Khamenei warned that Iran can impose sanctions on the West if necessary.
 
Industry, Mines and Trade Minister Mohammad Reza Nematzadeh criticized officials for downplaying the impact of international sanctions. “Why should we say war has no effect or sanctions have no effect?” Nematzadeh said at a conference. "Our educated youths can tell if you're lying… Let's put some cotton in their ears, scotch tape on their mouth. Why do you lie? It does have an effect. The country has become backward. There's inflation, recession,” he said. The comments were unusually candid for a public forum.
 
Minister of Economic Affairs and Finance Ali Tayebnia estimated that Iran’s economy could grow more than eight percent if international sanctions are lifted. In an interview with website of the supreme leader, Tayebnia said that Iran has been relatively successful in coping with sanctions. He argued that “one of the reasons why the West came to the negotiating table and recognized Iran’s right to peaceful nuclear technology was the relatively successful management of economy and sanctions.”
 
Economic problems: At a conference on Iran’s economy, Parliamentary Speaker Ali Larijani argued that Iran’s issues predate sanctions on its nuclear program. “Sanctions might have opened the wound of our ailing economy, but our economic problems are old… Before sanctions, unemployment was high; today 44 percent of our graduates are jobless. We must try to tackle these issues. State employment is the worst solution. Responsibilities should be delegated to the private sector so that the economy is run by the public,” he said, according to Iran Front Page’s translation of a state news report.
 
International Developments
 
Non-oil Exports: Iran’s non-oil exports exceeded $46 billion between March 2014 and February 2015, the first eleven months of the Iranian calendar year. The head of Iran’s Trade Promotion Organization Valiollah Afkhami Rad said the Islamic Republic exported 22 percent more than the previous year. Some 92 percent of the trade was conducted with Asia.
 
European Union: The European Union’s second highest court annulled sanctions on an Iranian bank and 40 shipping companies. E.U. governments had failed to prove that Bank Tejarat had supported Iran’s nuclear program or was involved in skirting sanctions. The shipping companies had been linked to the sanctioned Islamic Republic of Iran Shipping Lines, but the court also found insufficient evidence linking it the company to nuclear proliferation.
 
The court has granted E.U. governments time to appeal the ruling or re-impose sanctions on different legal grounds. In the meantime, the entities will remain under sanctions.
 
The Iranian chambers of commerce of France, Germany and the United Kingdom formed an alliance to facilitate business between E.U. countries and the Islamic Republic. The business bodies are concerned that European companies will face multiple complicated national export approval processes, which could give U.S. companies an advantage if sanctions are lifted.
 
United Kingdom: The London High Court rejected an application for an injunction from Iran’s main oil tanker firm, NITC. The firm sought the injunction because the European Union is due to put it back on the sanctions blacklist. It had been removed from the list in July 2014 after a European court ruled there were no grounds for the designation. The decision was setback to Iranian efforts to lift trade restrictions.
 
Germany: German exports to Iran in 2014 were 30 percent higher compared to the previous year. The Federal Statistics Office reported that Germany, one of Iran’s biggest European trade partners, exported some 2.4 billion euros worth of goods in 2014.
 
China: China imported some 27.5 million tons of Iranian crude oil and condensate in 2014, a 28.3 increase compared to 2013, according to the country’s customs administration.
 
Industry, Mines and Trade Minister Mohammad Reza Nematzadeh announced plans for Iran and China to jointly set up an industrial town in Jask port. The four acre area will be devoted to the petrochemical, aluminum and steel industries.
 
Russia: Ali Akbar Velayati, a top advisor to the supreme leader, visited Moscow and met with President Vladimir Putin. The two agreed to coordinate efforts to upgrade Iran’s observer status within the Shanghai Cooperation Organization. Velayati also met with Russian Foreign Minister Sergei Lavrov and Energy Minister Alexander Novak.
 
Levan Jagarian, ambassador to Iran, said that construction on a second nuclear power station at Bushehr is scheduled for fall 2015.
 
Iran and Russia plan to establish a joint account for payments in rubles and rials, according to Iranian Ambassador to Russia Mehdi Sanaei. Tehran also plans to sign a memorandum of understanding in 2015 with the Eurasian Economic Union to boost exports to Russia.
 
India: India imported 2.7 million barrels of crude per day from Iran in 2014, nearly a 42 increase compared to 2013.
 
India’s Exim (Development) Bank allocated Iran a $150 million credit that it will use to buy railway facilities.
 
Iraq: Iran plans to increase bilateral trade with Iraq from $12 billion a year to $20 billion, Finance and Economic Affairs Minister Tayebnia said on February 16. “Iran is ready to cooperate and provide technical and engineering services to Iraq, particularly in the fields of construction of roads, power plants and dams.” He also noted the opportunity to bolster religious tourism, which accounted for some $222 million of Iraq’s GDP in 2013. Iraq is home to many sites holy to Iran’s Shiites.
 
More than 250 Iranian companies showcased their products at an exhibition in Baghdad in February.
 
Turkey: Iran’s trade balance with Turkey dropped from $93 million to negative $1.497 billion during the period from March 2014 to January 2015 compared to the previous year, according to the Islamic Republic of Iran Customs Administration.
 
France: Iran’s largest car maker, Iran Khodro, signed an agreement with France’s Renault to import two models of cars in early or mid-2015.
 
Italy: Iran has exported some $800 million in goods and imported some $400 million from Italy, making it the “only European partner with which Iran has recorded a positive trade balance,” according to the chairman of the Iran-Italy Joint Chamber of Commerce, Ahmad Pourfallah.
 
Pakistan: Tehran denied rumors that it has decided not to fine Islamabad for falling behind schedule in constructing a multi-billion-dollar gas pipeline. The managing director of the national gas company noted in a press conference that Pakistan “had to deliver its commitments by starting import of Iran's gas supplies in December 2014, but it seems unlikely for Pakistan to take any measure before the end of 2015.”
 
Kuwait: Iran and Kuwait signed an agreement encouraging investment. Finance and Economic Affairs Minister Tayebnia said that Iran’s National Development Fund is prepared to supporting foreign investors interested in the Islamic Republic.
 
United Arab Emirates: Transportation officials from Iran and the UAE signed a memorandum of understanding to increase the number of flights between the two countries and establish a system for cooperation on aviation safety.
 
Algeria: Iran and Algeria signed two cooperation pacts on building infrastructure that will be carried out by the Islamic Republic.
 
Air industry: Iran has signed three agreements with Boeing since the interim nuclear deal was negotiated in late 2013. Two were extensions of existing agreements and one was a new one between Iran Air and the U.S. company. So far, Boeing has repaired seven of Iran Air’s plane engines, according to Iran Air CEO Farhad Parvaresh.
 
Germania, a German budget airline, announced plans to offer direct flights to Tehran and Mashhad starting in February. The one-way airfare is set to range from 220 to 250 euros depending on the German airport of origin.
 
Ebrahim Shoushtari, deputy head of Iran’s Aviation Operations Services, announced that flights over Iran increased more than 70 percent since August 2014, mainly due to ongoing conflicts that make flying over parts of Iraq, Syria and Ukraine unsafe. He noted a 20 to 25 percent increase in the number of international flights.
 

Sina Azodi, a research assistant at the Woodrow Wilson International Center for Scholars, contributed to this round-up.