The cornerstone of President Hassan Rouhani’s mandate has been the reintegration of Iran into global economic and political platforms. His tenure has so far focused on reaching a nuclear deal that rolls back sanctions, reaping the economic dividends from that deal and on distancing Iran from its pariah status. Tehran has so far used the positive momentum following the nuclear talks to re-engage with Europe after a period of political hiatus and to deepen its pre-existing economic ties with its neighbors in Russia and Asia. Now, a year after the Joint Comprehensive Plan of Action (JCPOA), Iran has increased its oil exports close to their 2011 pre-sanctions level and begun to put in place deals with a range of international investors. However, Iran has been disappointed with the slow pace at which preliminary agreements put in place with Europe over the past year have moved forward. In this light, and given Iran’s immediate and strategic priority to boost its economy and create job growth, Tehran is hedging its bets between Europe and the big Asian economies.
Opening with Europe
Rouhani’s election and the process of diplomacy over the nuclear issue created the political space needed for Europe to begin a détente process with Iran. Over the past three years, foreign ministers from almost all E.U. members states have visited Iran, accompanied by trade ministers or large business delegations. Just days after the JCPOA entered implementation day in January of 2016 and sanctions were eased, Rouhani visited Italy and France, marking the first official European visit by an Iranian president in over fifteen years. During these visits, Iran signed a range of political, cultural, and high profile trade deals to signal that Iran is back in business. In Italy, the Iranian delegation signed deals involving the mining, shipbuilding, energy and infrastructure sectors totaling roughly $18.4 billion. During Rouhani’s visit to France, Iran agreed on more than 20 contracts with French companies estimated to be worth over $40 billion in the energy, auto and aviation sectors. The most publicized deal was one reached between Iran and Airbus for the sale of 118 planes worth $27 billion. Shortly after, the Greek and Italian Prime Ministers became the first Western leaders to visit Iran in over a decade. During the visit, Italy announced it was extending a €5 billion credit line to facilitate Italian trade with Iran. This was followed in April by a visit to Tehran by the E.U. High Representative Federica Mogherini and seven E.U. Commissioners to start a formalized and structured dialogue between the E.U. and Iran. Stacks of preliminary contracts have been signed between Iran and Europe, ranging from small to major deals. So far, though, many of these, including the Airbus deal, have been unable to move forward primarily due to problems with securing necessary banking and financial support or the necessary U.S. Treasury OFAC authorization. The large European financial institutions needed to transact such volumes of business are either unwilling (due to a mix of political risk in doing business with Iran and the perceived unpredictability of future U.S. sanctions on Iran), or unable (given their high exposure to the U.S. market and risk of falling foul of U.S. primary sanctions) to do so. There is a growing perception amongst Iran’s political and economic leaders that Europe has been overcautious and slow at re-entering the Iranian market to regain its place as the top trade partner. The Rouhani administration wishes to allow more time to test a European comeback, but simultaneously the government has welcomed greater investment from the likes of Russia, China, India and South Korea, countries that have shown both strong interest and a greater ability to enlarge their presence in the Iranian market.
Tehran has so far used the positive momentum following the nuclear talks to re-engage with Europe and to deepen its pre-existing economic ties with its neighbors in Russia and Asia
Iran's Asia pivot?
Iran has long been doing business with Asian countries; even throughout sanctions, many Asian companies were given special exemption by the U.S. Treasury to continue dealings with Iran, particularly to meet their energy needs. China perhaps profited the most during the decade long sanctions on Iran’s nuclear program. During this period, China overtook Europe as Iran’s top trading partner with roughly $52 billion worth of trade in 2014. In January 2016, President Xi Jinping was the second P5 member, after the Russian President, to visit Tehran specifically to ensure that China remained a frontrunner in the Iranian economy. Xi and Rouhani agreed on a 25-year roadmap for developing relations between their nations, including 17 agreements focused on energy and infrastructure. Based on this, they estimated that bilateral trade would rise to $600 billion in the next decade. Iran is assured that China has both the financial capacity to invest in Iran and the need for Iranian energy resources. While China also depends on Saudi Arabia for its oil (and indeed Xi’s visit to Iran marked the final leg of his Middle East tour), Iran has an added advantage given its geographical positioning, which makes it an important player in China’s One Belt One Road initiative.
South Korea has also re-entered the Iranian market in a big way. During a visit by President Park Geun-hye to Tehran in May, the two countries agreed on a financial package pledge by South Korea to cover deals with Iran worth an estimated $25 billion. Iran is expected to plan for LNG exports to South Korea (having already signed a memorandum of understanding to this effect in May).
Another significant and emerging economic partner for Iran is India. During Prime Minister Narendra Modi’s visit to Tehran in May, a tripartite deal was reached between India, Iran and Afghanistan for the construction of Chabahar port in southern Iran. Under this deal, India has agreed to contribute $500 million to finance the development and pledged to invest $16 billion in a free trade zone around the port. The deal also sets in motion a transit agreement for new railroads and roads connecting Chabahar to Afghanistan, with the objective of creating direct trade routes connecting India to Central Asia. If these agreements were implemented, it would enable India to bypass Pakistan’s rival Gwadar port when transiting goods to landlocked Afghanistan. In April, India’s energy minister signed contracts for developing Iran’s Farzad-B gas field and increasing export of Iranian oil to India. This deal in effect mitigates some of the profit Iran has lost as a consequence of a largely failed “peace pipeline‘ agreement with Pakistan, one intended to create a transit route for export of Iranian gas to Pakistan. Discussions for this project began in 1994, and various complications have delayed the completion of the Pakistani segments. While Pakistan is a significant economy in Asia, it carries more geostrategic than economic importance for Iran, as signified in Rouhani’s official visit to Pakistan, where the roadmap for cooperation focused more on security issues. Another important deal in which India plays a key role for Iran, and which is perhaps the biggest game-changer for regional trade, will be the North-South Corridor project, connecting St. Petersburg to Mumbai, with Iran as the transit hub. This development has been underway for a number of years and partly stalled when Iran came under nuclear related sanctions. Completion of this project is estimated in the next five years and will provide Russia with access to the sea via the Persian and Omani Gulf. This reduces the need to carry goods via the expensive Suez Canal and is estimated to cut cargo transport times in the region by 50 percent. Once complete, the corridor links Russia, India, Iran and Central Asia and will carry with it huge geopolitical ramifications.
In the period leading up to the presidential race, Hassan Rouhani will be judged first and foremost on his track record of delivery on the economic front
Iran, like the United States, has entered a presidential election year in which the nuclear deal will become one of the litmus tests for judging candidates. The stakes are high for Rouhani, who is expected to stand for re-election in Spring 2017. During his previous election campaign, he prioritized economic growth for Iran and promised Iranians an end to sanctions and isolation in addition to reintegrating the country into the global political and commercial platforms. In the run-up to the presidential race, Rouhani will be judged first and foremost on his record of delivery on the economy. His administration has targeted European trade and investment as a major part of its plans for Iran’s economic revitalisation. Iran always recognized the growing technological advantage of Western goods, but the period of sanctions provided clarity that Iran’s most profitable industries could not achieve their full potential with Russian or Chinese investment. Over the summer, Iran will focus its political weight on resolving the existing deadlocks for access to global financial networks and to find pathways to execute the high profile deals it has negotiated with European companies. At the same time, Iran is increasing efforts to update its banking sector with assistance from the International Monetary Fund. However, if European companies continue to face hurdles in re-entering the Iranian market, it seems unlikely that Tehran can look to Europe for an immediate economic boost. Therefore, the Rouhani administration has pragmatically hedged its bets with Asian countries, notably China, India and South Korea, which may prove to have greater economic maneuverability for trade and investment with Iran.