Iran Faces Uphill Battle to Economic Recovery

 

The Obama administration continues to promote the claim that even if sanctions are removed immediately after June 30, they will be able to snap back into place as soon as Iranian cheating is detected. But others have described this narrative as unrealistic, saying that there will be serious obstacles to such snap-back, including the financial interests of governments and business firms that are counting on newfound Iranian investment opportunities.

On the other hand, it is still not entirely clear how strong the initial foreign investment interest will be. What’s more, this uncertainty may actually be a barrier to investment in and of itself, because Iran is a particularly insecure investment opportunity if relatively few foreign firms are willing to provide it with financial capital in addition to the unfrozen assets and sanctions relief associated with the negotiations.

On Monday, Customs Today notes that the German Federal Ministry of Economics has estimated that Iran will need 100 billion dollars’ worth of investment every year following the removal of sanctions. And while the ministry also expects that German trade with Iran will significantly increase if and when sanctions are removed, the current value of German exports to Iran is only about four and a half billion dollars.

Iran can be expected to purchase much higher levels of foreign goods as the country races to modernize infrastructure, industry, and other sectors of the economy that have been practically frozen by the effects of sanctions. But this will only be possible in the presence of large amounts of foreign capital. Even if nations like Germany wish to increase trade with Iran, that is no guarantee that they will contribute more to the Iranian economy than they take from it, especially if global oil prices remain low or fall even further.

Such a situation is widely anticipated. Reuters reported on Monday that Iran’s Deputy Oil Minister Rokneddin Javadi had admitted that the Organization of Petroleum Exporting Countries was still unlikely to vote to cut oil supplies in order to stabilize prices. This decision – opposed by Iran and Venezuela – is partly attributed to Arab competition with boosted levels of US shale oil. But Saudi Arabia’s opposition to supply cuts has also previously been put in context with its rivalry of Iran and its opposition to the Iran nuclear deal.

Antagonism between the two major Middle Eastern powers has only increased in recent weeks, especially in light of Iran’s backing for the Houthi rebels in Yemen, which has helped to place a militant Shiite force just across the border with Sunni Saudi Arabia. On Monday it was reported that Saudi bombing against Houthi targets was ongoing, over the Iranian regime’s stringent protests to the international community.

This antagonism surely raises the profile of Saudi opposition to Iranian economic interests, and this opposition is ongoing through more venues than just OPEC. On Monday, Bloomberg published a brief investors guide to both Saudi Arabia and Iran. While this arguably points to the presence of significant Western interest in Iranian investment opportunities, the details also indicate that Saudi Arabia will present a serious challenge to those opportunities when it opens up to direct foreign investment on June 15, two weeks before the conclusion of the Iran nuclear deal.

The Bloomberg report acknowledges that some foreign firms are positioning themselves for speedy investment in Iran after that deal. But it also points out that the value of the Tehran Stock Exchange fell by 21 percent last year and by 7.9 percent so far this year. Furthermore, Bloomberg concludes with a side-by-side description of the political conditions in the two countries. Notwithstanding perceived US-Iranian rapprochement under the Obama administration, Iran still has a contentious relationship with the West, whereas Saudi Arabia is a long-established ally.

All of this suggests that Saudi investment opportunities may appear to some foreign firms, especially Western ones, as a more secure alternative to the opening of the Iranian market. And this is potentially reflected in the observed limits on Western and particularly US overtures toward Iranian business interests.

On Monday, UPI reported that Mehdi Hosseni, the head of a contract revision committee in the Iranian oil ministry admitted that Iran had had no contact with US oil companies despite prior expectation to the contrary. In fact, this admission directly contradicts another Iranian oil ministry official’s claim in early May that a US oil delegation was set to visit Tehran.

That claim was called into question by US officials who noted that the Iranian official had failed to name a single specific company or individual. The US State Department has specifically cautioned American businesses and US allies against hasty investment in Iran, saying that the Islamic Republic is “not open for business yet.”

Incidents like this point to a tendency of the Iranian regime to exaggerate its own economic opportunities. Thus, the Reuters report on Monday indicating that Iran expects a return to full-scale oil exports within three months of the nuclear deal cannot be taken for granted. Indeed, many international analysts have claimed that even if sanctions are removed quickly upon the conclusion of a deal, potential foreign investors are likely to remain nervous, and Iran will face a long pathway to significant recovery.

And even if serious investment opportunities are forthcoming, foreign capital is highly unlikely to translate into improved circumstances for average Iranians. The Obama administration has attempted to argue that Iran would likely invest new assets in stabilizing its economy across the board, but White House spokesperson Josh Earnest admitted in a May press conference that the regime has violated common sense in the past by dedicating limited resources to support for terrorism and intrusive foreign activities.

On Sunday, Al Arabiya News issued a report on the epidemic of Iranian poverty, saying of this situation, “The most fundamental reasons are the widespread corruption, misallocations of funds, dysfunctional banking and tax system, miscalculated subsidies, and state-led, state-controlled and state-owned [nature] of major economic sectors.”

Because of these factors, the Iranian people face an uphill battle to economic recovery even under ideal external conditions. But recent reports suggest that because of the political situation and foreign competition, those conditions are not perfect for the Iranian regime, which may face its own uphill battle to the levels of economic recovery that it publicly claims to be anticipating.