New Prospects for Western Trade with Iran, but Old Obstacles Remain

The Islamic Republic’s commercial air fleet is badly in need of upgrades and repairs as a result of the effects of years-long economic sanctions. Consequently, some Western manufacturers were quick to explore their options once those sanctions were lifted, and the French-based Airbus even went so far as to sign a contract for the sale of 118 jets worth 27 billion dollars, almost immediately after the JCPOA was implemented in January.

The finalization of the contract encouraged greater speculation about Airbus competitors, especially the US aircraft giant Boeing, entering into similar agreements despite their uncertainty about the stability of the Iranian market and the restrictions that remained in place on doing business with the Islamic Republic. Now that speculation has been amplified once again, with Reuters reporting that IranAir and Boeing are in talks over a deal that would roughly match that which was agreed between IranAir and Airbus.

In addition, IranAir is in talks with international banking institutions over the ways in which they could facilitate such a sale without falling afoul of US sanctions that still remain in place, unrelated to the Iranian nuclear program. US law prevents direct interaction between the Iranian and American financial systems, meaning that unless existing rules change or Iran makes an effort to come into compliance with international rules, payments will have to be made in a form other than American dollars.

This creates less of a problem for Airbus than it does for Boeing, as the former can receive payment in Euros via financiers who would themselves be paid in local currency by the Iranians. As Boeing will ultimately need to deal in dollars, this difference highlights the obstacles that still may prevent a final sales contract, despite the interest that apparently exists on both sides.

Of course, this is nothing new. Virtually since the implementation of the JCPOA, it has been variously reported that Boeing and a number of other American and European companies have been exploring the prospect of new trade agreements with Iran, but have fallen far short of finalizing those agreements due to the outstanding issues related to sanctions and a lack of willing financial intermediaries.

The persistence of these obstacles was also brought up by a separate but related Reuters report on Monday, this one dealing with the weapons and commercial aircraft manufacturer Lockheed Martin, which is also reportedly at a serious phase of exploring possible business with Iran. The would-be contract involves the sale of commercial helicopters via the Lockheed subsidiary Sikorsky. It is apparently the first serious expression of interest from that parent company, and a brand new indication that Iran might be a viable market for commercial helicopters. In fact, that speculation also has its roots in Airbus, which said that it saw a demand for this product sometime after it arranged the sale of commercial jets.

Despite the fact that Lockheed Martin has picked up on this apparent demand, the American company also indicates that it still sees great need for government guidance as to what business will be permitted and under what conditions. Furthermore, Reuters indicates that even if these questions are successfully cleared up, there will continue to be obstacles for Lockheed, Boeing, and other companies, stemming in part from lingering skepticism about the longevity and effects of the JCPOA.

Despite the emphasis being given in some circles to Iran’s commercial aircraft and other potential foreign imports, the strength of its economy and by extension its trade with other countries will certainly hinge in very large part upon the ongoing recovery of its oil economy. This also presents a potential obstacle to other sorts of agreements, but it also illustrates the power that some foreign nations could have to influence Iran’s long-term prospects.

Iranian officials have attempted to entice investors and to encourage confidence in the Iranian oil economy by making bold claims about the extent to which it has already recovered. They have, for instance, claimed that the country has already recovered to pre-sanctions levels of output, totaling roughly four million barrels per day on average. And although some independent analysts have indicated that these figures are likely not sustainable insofar as they reflect the sale of large quantities that have been held in storage, there are nonetheless some indications that it is having its effect on a certain portion of foreign investors.

On Monday, the Middle East and North Africa Financial Network reported that one Austrian firm had joined the ranks of prospective investors by essentially pinning down plans to invest six billion dollars in an Iranian petrochemical plant and oil refinery. The contract for this agreement has not yet been finalized but is expected within 30 days. However, there is arguably much that could alter the global market’s expectations regarding Iran’s recovery in the next month or so.

As it regards oil in particular, the deepening competition between Iran and Saudi Arabia is one major factor in the still-emerging conditions. Last week, Iranian-Saudi discord once again prevented an agreement among OPEC powers regarding a collective freeze on production. It is now already apparent that the effects of this will be to encourage more aggressive competition between the two OPEC rivals, thereby possibly forestalling Iran’s recovery and keeping global oil prices at artificially low levels.

One of the latest and clearest indicators of this trend was reported in the Wall Street Journal on Monday. The article noted that at the same time that Iran has continued to ramp up production with an eye toward securing its supposed pre-sanctions levels of output, the Saudis have made the surprising move of cutting prices at a time when overall market conditions would ordinarily dictate increased profits. This goes to show that the Saudis, and potentially some of their regional allies, are more interested in defending market share against Iranian intrusions than they are in maximizing profits.

Recent political conflicts and proxy wars between Iran and Saudi Arabia help to make it clear that this strategy is not only a response to the economic threat posed by an Iranian recovery, but also the broader threat that Saudi Arabia perceives as coming from a wealthier Islamic Republic that has greater influence in the whole of the Middle East.

And of course, the Saudis are far from being alone in this regard. The level of international agreement with those concerns may still have a strong effect on the extent to which the world community encourages or allows foreign investment in Iran. If these concerns become predominant, they may even serve to undercut the longevity of the JCPOA itself.

Over the past several weeks, the White House has taken a leading role in encouraging investment, making it clear that Western companies will not be penalized for dealings with Iran that are legal under the nuclear agreement. But at the same time, the Obama administration and its allies have come under fire from many of those who share Saudi concerns, including many members of the US Congress.

Their concerns about an enriched Islamic Republic were arguably given a significant boost last week when, as Breitbart reports, the State Department delivered a briefing on its latest report on global terrorism and explained that Iran remains the world’s second greatest terrorist threat, after the Islamic State of Iraq and the Levant. Such statements could be harmful to Western businesses’ perceptions of the viability of the Iranian market, especially at a time when Iranian officials insist that they will not make changes to alleviate concerns about terrorism and human rights.

Also last week, Iranian Supreme Leader Ali Khamenei delivered a speech on the occasion of the anniversary of the death of the founder of the Islamic Republic. In it, he declared that Iran would not cooperate with the US in their mutual fight against the Islamic State, and he accused Western powers of using the issues of terrorism and human rights as a “pretense” for withholding assistance to Iran’s economic recovery.

As well as highlighting the long-established concerns about the potential uses of Iranian wealth, this sort of commentary serves to remind potential foreign investors about the cold reception that Western individuals can be expected to receive from their would-be Iranian business partners. This issue was further highlighted on Monday when Naharnet reported that the trial had been delayed in the case of American permanent resident Nizar Zakka had been delayed. Zakka, a Lebanese-born IT expert, is among a number of individuals who have been arrested since the conclusion of nuclear negotiations on the basis of their ties to the West, and subjected to apparently groundless accusations of spying, in what many see as an effort by Iranian hardliners to discourage foreign economic “infiltration” into the Islamic Republic.