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WHAT COULD THE DIPLOMATIC SUCCESS BRING TO BUSINESSES WITH IRAN DEAL?

2015-08-06

On July 14, 2015 Iran and the P5+1 Countries (China, France, Russia, USA and the UK plus Germany) and the European Union have reached a landmark agreement on Iran’s nuclear program, known as the Joint Comprehensive Plan of Action “JCPOA”. The deal will limit Iran’s nuclear capabilities to non-military objectives in exchange for a comprehensive suspension of all UN Security Council sanctions as well as multilateral and national sanctions in relation to Iran’s nuclear program, including steps on access in areas of trade, technology, finance, and energy.

It should be clear that lifting of the sanctions is not immediate. As stated in the JCPOA, the termination of the sanctions is to take place simultaneously with the International Atomic Energy Agency “IAEA” verified implementation of agreed nuclear-related measures by Iran. Even though the process for implementing the agreement is complex and lengthy, on July 20, 2015 the UN Security Council adopted a resolution turning the JCPOA agreement into international law, which is considered to be the beginning of the end of the sanctions regime on Iran’s economy that will be lifted later this year.

Undoubtedly, the deal would give much of the world access to Iranian markets creating significant opportunities for international trade and growth. Consequently, it would be of huge benefit to Iran’s own economy as well as to local companies. In the meantime, it has been reported that many of international investors are racing to secure business opportunities with Tehran, especially Europeans and Americans.

The Iranian National Economy

Iran is the second largest economy in the MENA region after Saudi Arabia, with an estimated Gross Domestic Product “GDP” of USD 406.3 billion in 2014. The country also has the second largest population of the region after Egypt, with 80.8 million and over 60% of its population estimated to be under the age of 30. Undeniably, the broad-ranging sanctions have had its impact on the economy, with the oil exports falling from 2.2 million barrels per day in 2011 to only 700 thousand in 2013. In return, as the sanctions effectively proscribed trade between EU and Iran, the sanctions hit EU firms too, by losing up to billions of Euros of potential export revenue.

However, even under the sanctions, Iran’s oil-dominated economy rebounded out of recession, with growth estimated at 3.0% in 2014 compared to 1.7% in 2013. In addition, the economy has also benefited from the real exchange rate depreciation through improved international competitiveness in the agriculture, manufacturing, and non-oil exports. According to Iran’s Customs Administration data, non-oil exports rose 24.2% in the period between March 2014 and January 2015, compared to the same period in the previous year.

With the aim of improving the prospects for the economy, Iran’s government has announced several measures, such as raising the productive capacity of the non-oil segment of the economy as it is a high priority for the government and opening the oil sector to foreign companies for investment and technical assistance.

Coupled with the sanctions relief, these initiatives would ultimately increase the country’s potential, raise the purchasing power of the consumers as well as support consumption and business investment through improved consumer and business confidence.

The Rush to Secure Deals with Iran

The amount of interest in doing business with, and in Iran has been implausible. Even before closing the historical deal with Iran, major multinational firms have been planning new or expanded investment in the country. Moreover, Iranian vast untapped emerging markets have urged European ministers to schedule trade trips to snap up lucrative deals in Iran. Germany’s Economy Minister was the leader of the pack, along with 100 strong business delegations. France has also confirmed the invitation to visit Tehran, yet to send their delegation.

The real winners could be companies from across the globe. However, it is expected that companies that are already doing business in Iran in the field of humanitarian trade such as agriculture and pharmaceuticals, to perhaps be the first beneficiaries by increasing their exposure to the Iranian market.

In addition, many European companies which were active in Iran until 2010, now have the chance to re-enter the market again by signing of the deal. European luxury brands are popular with the elite in major cities, not to mention that Iran is the second biggest cosmetics market in the Middle East. In the meantime, all consumer-oriented sectors, such as electronics, leisure, and hospitality are expected to pose the best short-term opportunities.

The market for cars is huge. Iran is one of the largest car markets in this Middle East. Indeed, this explains the rush of the European car manufacturers to re-enter the Iranian market as they were the market leaders before imposing the sanctions, such as Peugeot, Mercedes-Benz, Volkswagen, and General Motors. Heavy industries such as steel and aluminium are also expected to flood into the market, thanks to sanctions relief and the cheap gas. Also, the players in the financial services industry will likely benefit from the removal of sanctions in the years ahead. Swiss banks are already offering their services as fast-track alternatives to banks within the EU, which will take time for their benefits to be realized after lifting up the sanctions.

Iran’s Energy Sector

As per the energy field, according to the U.S. Energy Information Administration, Iran holds the world’s second-largest natural gas reserves and the fourth-largest proved crude oil reserves. Thus, sanction relief will create opportunities for energy firms, especially that Iran is planning to change its petroleum contract model to allow International Oil Companies “IOCs” to participate in all phases of an upstream project, including production.

However, the gain may not be in favour of the American firms, as the American sanctions relief will primarily be applicable to sanctions imposed on Non-American persons i.e. American sanctions that have been preventing U.S. citizens from investing in Iran will remain in place. Consequently, the European and Asian energy companies will most likely be the beneficiaries of the deal, not to mention that other players in the energy industry are also likely to benefit, including providers of technological advances and innovation solutions, tankers and oil and gas field services.

Concluding Remarks

The deal with Iran is in itself a major diplomatic achievement. In addition to its importance of reducing the likelihood of another war in the Middle East, the deal opens enormous opportunities for trade and growth, if Iran prepares for an attractive business environment. It should be noted that doing business in Iran is not expected to change overnight as the legal system is outdated with restrictive labour laws, in addition to the fact that the county has been behind a wall of sanctions for so long lacking experience in dealing with international investors, but the Iranian market is too large to ignore. However, it has been reported that the government are preparing for a package of incentives to attract investors into sector ranging from energy to agriculture, light manufacturing and free zones.

 

Magnusson’s Middle East Group

The Middle East offers to companies from the Baltic Sea Region a wide range of business opportunities, with developments in Iran broadening the scope of what can be achieved on Middle Eastern markets. Whether it is trade, a joint venture project with a local partner, participation in procurement proceedings, arbitration, or foreign direct investment, we are ready to guide you in the Middle East.

 

Related People:  Saideh Yahyavi, Maher Khadour, Tomi Merenheimo, Mariusz Kowalski

Related Service Areas: Commercial, Corporate and M&A, Energy and infrastructure, Middle East Group

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