A trade embargo and other sanctions imposed by the West (the USA, the UN, the EU and individual European states like the UK) have paralyzed the Iranian economy, affecting strategic sectors like energy and finance. With the historic nuclear deal signed in Vienna and the progressive removal of harsh restrictions, Tehran has its resumed leading role in the global economy, with access to funds that have been blocked for years and able to take full advantage of oil & gas exports.
It’s a grand comeback. Iran boasts a population of 75 million people, 60% of whom under 30 years old. It is one of the world’s 20 largest economies, in the Middle East second only to Saudi Arabia. Tehran also commands one of the planet’s most strategic territories, a land corridor between the Caspian Sea and the Gulf of Oman that is set to become increasingly important in the coming years,. The country has abundant hydrocarbon resources: the fourth largest oil supply in the world and the second highest natural gas reserves. By significantly cutting into fossil fuel exports, the largest source of revenue in the Iranian economy, and placing obstacles on international transactions into the country, the sanctions represented a major obstacle to economic growth. During 2013-2014, Iran’s GDP declined by 3%, a trend that saw a slight but decisive reversal during the following two-year period, with +1%. The new friendly disposition of the international community, in spite of rising tensions with regional neighbors following Iran’s increased involvement in the Syrian conflict, offers a chance to bridge the gap created during the embargo years and engage with larger and more dynamic markets. The Iranian economy has undergone profound changes and continues to struggle to move beyond a centrally planned economy to a more dynamic system based on a free market model. The state continues to have a heavy-handed presence in Iran’s major companies, as indicated by the tradition of entrusting the vice-ministry to administrators of the major state companies. State control tends to be tighter in key sectors like fossil fuels, heavy industry, space exploration and defense, distorting prices and quantities of products put on the market. This entanglement of state and economy hinders the rise of new national and foreign players and keeps in place an absolute advantage for state-controlled and partially state-controlled companies. At the moment, nearly all of the country’s economic potential is driven by the energy sector and exportation of natural resources. According to a recent IMF study, Iran’s GDP is growing by a solid 7.4%, but if the oil industry is removed from the equation, that figure goes down to just 1%. And so the country’s economic growth, firmly anchored to the energy market, remains extremely volatile.
Even though Iran is actively involved in the Economic Cooperation Organization (ECO) in order to create a regional free economic area, the country remains excluded from the WTO. Iran’s ability to join the WTO has been repeatedly shut down by the United States, first on the basis of accusations of supporting terrorism, then for the advancement of its nuclear program. However, the thawing of relations effected by Rouhani and Obama has had unexpected repercussions in this arena. Some analysts believe that Iran’s integration with international commerce could be the catalyst for liberalization of its economy and, eventually, of its political system. Various observers agree that, during the years of isolation, the Revolutionary Guards managed to tighten their grip on the economy, to the point that they were able to take control of a third of the national budget, nearly the entirety of the black market and roughly half of the telecom industry. Tehran’s acceptance of WTO rules on competitiveness could set the country on a new course. The years in isolation forced Tehran to strengthen economic ties especially with Asian partners. The UAE, China and South Korea are its main suppliers of steel products, industrial machinery, vehicles, electronics and food products, while China, India and Turkey import Iranian refined petroleum products and goods produced by the country’s chemical and mineral industries. China in particular enjoys a privileged partnership with Iran. It is the Islamic Republic’s main trade partner and top supplier of machinery for the Iranian nuclear industry. Ties with the United Arab Emirates have also strengthened due to the necessity of bypassing measures imposed by the embargo. However, the new breathing room accorded by the Vienna deal – and the strengthening of the Iranian Rial – would seem to indicate growing trade especially with the European Union.
Major benchmarks remain to be reached. Even though Iran has already managed to get a period of robust growth under its belt and, in spite of hindrances, and bring inflation to below 15%, the economy still has a vulnerable dependence on crude oil price performance: dropping prices have hit state revenue hard. For this reason, the Rouhani government has been working to reduce state subsidies in key economic sectors. Moreover, unemployment among Iran’s large and well-educated younger generation remains rampant, reaching 24.3% in 2013, compared to an overall unemployment rate of 10.3%. The regime in Tehran will have to deal with this issue for the sake of political stability. Lastly, but not least importantly, the competitiveness of the Iranian economy is considerably hampered by intervention of the state and the bonyads, which by fixing consumer goods prices are immobilizing the economy as a whole.