The return of Iran, the world’s 28th-largest economy, to the global stage is the single biggest diplomatically driven economic game changer since the fall of the Iron Curtain in 1989. After years of negotiations, the international community finally lifted economic sanctions on Iran in mid-January in return for Iran limiting development of nuclear weapons.
Aside from the political and security implications of the deal, the economic and commercial impacts will resound within Iran, throughout the region, and around the world over the next few years. However, Iran’s re-entry is not all plain sailing. A number of caveats should be noted in respect to the lifting of sanctions.
First, the sanctions can be reapplied at any time if Iran is found to be in contravention of the nuclear agreement. Sanctions would then be reapplied for at least 10 years, with a possible extension for a further five years. In addition, a number of sanctions remain in place, including a UN arms embargo for the next five years.
More importantly, a number of US sanctions predate the nuclear dispute, stretching back as far as the Tehran embassy hostage crisis in 1979. These sanctions are unlikely to be lifted in the medium term. Indeed, Dun & Bradstreet economists expect the Republican-dominated Congress to continue to try and impose further sanctions, although it is likely that any far-reaching measures would be overturned by President Obama. However, should a Republican president be elected this year, support for further sanctions are likely, ensuring that risks for US businesses dealing with Iran remain elevated. US companies may wish to wait for the outcome of the presidential election.
In addition, European banks are wary of becoming involved in cross-border operations for fear of fines being imposed by US regulators for breaking US sanctions. Many banks previously fined for breaching sanctions have committed to not dealing with Iranian passport holders or companies.
Although the Iranian economy and businesses will undoubtedly benefit from the lifting of sanctions, caution is warranted, as a number of factors could curtail potential business activity. First, in relation to the hydrocarbon sector, Tehran’s latest contracts do not meet international norms, although they are better than previous versions and have met with guarded approval from the international oil companies.
Second, the business environment remains challenging: The World Bank’s 2016 Doing Business Report ranks Iran 118 out of 189 countries surveyed. Corruption is endemic: In Transparency International’s 2015 Corruptions Perception Index, Iran was ranked at 130 out of the 168 countries surveyed.
Third, much business activity is dominated by quasi-state companies such as the bonyads (charitable foundations) controlled by the clergy and the business wing of the Revolutionary Guards. This creates an uneven playing field, not just for foreign companies but also for domestic companies without links to the political establishment.
Regionally, the deal will have positive and negative impacts. Countries that act as an entrepôt hub for Iran, such as the UAE, will benefit from the increased trade opportunities and from the provision of business services. However, the weakening of oil prices will also curtail economic growth potential in these countries. More broadly, Dun & Bradstreet expects companies from regional countries that have helped Iran bypass or mitigate the sanctions regime, such as the Gulf States and Turkey, will be favored in the postsanctions environment, putting Western companies at a possible disadvantage.
At a global level, the deal will boost trade and investment flows at a time when both are weak due to other headwinds in the global economy, such as lower Chinese growth. Furthermore, it will ensure that downward pressure remains on oil and gas prices into the medium term as access to the country’s vast reserves is opened up fully, boosting profitability in global energy-intensive manufacturing and transportation sectors in the short term, but curtailing investment in the oil and gas sector. Most importantly, the lack of investment will result in a sharp rebound in global energy prices into the medium term as supply falls behind demand.
Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham Universities and has published widely on regional issues and the hydrocarbon sector.