Sunday, 23 April, 2017

The lifting Of Iran’s sanctions: A win-win situation

By Nikou Asgari, The Market Mogul‎

In early January, years of economic sanctions on Iran were relieved after the United Nations reached a deal with the country’s government upon agreeing that it had sufficiently dismantled its nuclear weapons programme.

The European Union and the US also placed their own trade restrictions on the country which massively hurt the Iranian economy – the national currency, the rial, fell by 50% against the dollar following heightened banking restrictions in 2012, and inflation was at one point 40%. Economic sanctions such as an embargo on oil exports, the freezing of funds abroad, and the ban on Iran’s use of the global banking system and SWIFT payments for trading were lifted this year to the joy of Iranians who celebrated by partying in the streets when the news was announced.

The positive impact on the Iranian economy is frequently analysed but what is reported less often is the effect that these bettered trade relations will have on the US’ and EU’s economies.

The Past: The Effects Of Sanctions

In the pre-sanction era of 2000-2004, it was reported that the UK’s exports to Iran rose from £296m to £443.8m, highlighting the UK’s benefit of trading with this Middle Eastern country.

With oil being a vast natural resource and Iran a founding member of OPEC, the country is thus a huge oil and petroleum exporter. Lifting sanctions on oil exports and increasing Iran’s oil production is deemed to reduce the global price of petroleum by 10%, saving the US $76bn annually. The same study also argues that the US economy would gain $46bn through the trade of services and non-oil products with Iran.

According to the European Commission, the EU used to be Iran’s primary trading partner with most EU imports relating to the energy industry but the EU ceased all oil imports from Iran in 2012. 35.9 million tonnes of Persian crude oil were imported by the EU in 2004 but Iran’s largest export partner is now China, which accounts for 22.2% of total Iranian exports.

Following the UN’s nuclear deal, sanctions were eased, the British embassy in Tehran reopened and the Iranian embassy in Southwest London also reopened. It is estimated that the sanctions which were first imposed in 2006 cost Iran $60bn in oil investments.

The Present: Friendlier Relations

In July this year, British Airways recommenced its direct flights to Iran’s capital Tehran following an almost four-year long break. The airline has resumed direct flights by operating six per week and is set to increase to daily flights in winter. British Airways called Tehran a “brilliant business city” while Morgan Stanley previously said that the lifting of sanctions meant that Iran was the “largest economy to return to the global fold since the break-up of the Soviet Union.”

The recommencement of British Airways flights coupled with the reopening of the British embassy has resulted in a surge in interest in Iran as a holiday destination. Tour operator Travel the Unknown saw a 65% increase in passengers which led to Iran becoming its most sought after destination in 2016. Aside from the obvious economic benefits that tourism will bring to Iran, the opening of its cities and culture will encourage Iranian businesses to diversify.

The Future: Investment Opportunities

The British government stated that it “encourages UK businesses to take advantage of the commercial opportunities that will arise” from an open trade relationship with Iran. It is not the first institution to recognise that opportunities exist within this Asian country. As one of the Next Eleven countries recognised by Goldman Sachs for their promising outlook for future growth, Iran is welcoming foreign investment.

Clearly, the major investments lie in Iran’s oil and gas industry as the country holds 10% of the world’s petroleum reserves and has the second largest natural gas reserve in the world. Nuclear deal negotiations meant that $100bn of foreign assets and money were unfrozen and the Iranian government said that they would spend this money on improving efficiency in the petrochemical, gas and mining sectors among other things. Iran’s re-emergence onto the global oil scene may reduce supply instability from places such as Libya and Iraq as well as provide another option for countries whose choice of oil suppliers became strained over crises in the Middle East or Ukraine.

The potential for diverse investment is rife with car manufacturer already conducting market research in Iran to see where and how their cars would capture a near 80 million populous market who last year bought 1.1 million cars.

Permitted back onto the global transaction network SWIFT, British banking regulators are looking to allow Iranian banks Persia International and Melli Bank to resume operations. This depends on the two institutions following regulatory criteria such as capital requirements and risk management procedures, as set out by the Bank of England.

As a country with 60% of its population under 30 and with an aspirational, consumerist middle class, the lifting of major sanctions on Iran has led to an opening up of relations with more countries. This will surely begin to heal the wounds that years of sanctions have created, as well as bode well for all people involved.

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