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EU eyes return as Iran’s first trade partner

With the lifting of nuclear-related sanctions, Iran and the European Union can now restore their commercial ties — but not without bumps in the road.

TEHRAN, Iran — The European Union’s foreign policy chief has stated that the 28-member bloc once again wants to become Iran’s biggest trading partner. “We are the ones that used to be Iran’s first partner on the economic fields, on trade, investment, and we want to be back to that,” Federica Mogherini told Tasnim News Agency during her one-day trip to Tehran on April 16.

Indeed, an increasing number of European political and trade delegations have visited Iran following the Jan. 16 removal of nuclear-related sanctions. With Iran determined to rebuild its economy, which has been hampered by sanctions over the past decade, and the EU still reeling from its debt crisis, which began in 2009, the expansion of economic ties is perceived to be beneficial for both sides.

A former senior Iranian diplomat who spoke to Al-Monitor on condition of anonymity said the development of ties has turned into a “necessity for [both] Tehran and the EU.”

He said, “Economic ties with Europe is advantageous for Iran in terms of development, and it carries [fewer] issues than relations with the United States. Europe’s approach to Iran has been, is and will be strategic and long term as far as energy security is concerned, because the continent has no better choice to substitute Iran’s oil and gas resources.”

For Iran, the former Iranian diplomat underscored that “access to European markets and the use of its advanced technology have historic roots and is an economical option.”

Relations between Iran and the European Union date back to 1963. After the 1979 Islamic Revolution, the relationship was maintained — despite many ups and downs.

In the early 1990s, relations began improving. Following the 1997 election of Reformist President Mohammad Khatami (1997-2005), ties greatly expanded in many areas, including trade, culture and academic exchanges. Indeed, EU exports to Iran increased from 3.9 billion euros ($4.3 billion) in 1996 to 11.3 billion euros ($12.6 billion) in 2006, while imports expanded from 5.8 billion euros ($6.4 billion) in 1996 to 14.1 billion euros ($15.7 billion) in 2006. As such, the EU during this period became Iran’s largest trade partner. In 2006, it was the destination of 38% of Iranian exports and accounted for 31% of Iranian imports.

Following the election of Principlist President Mahmoud Ahmadinejad in 2005, and the heightening of political tensions with the West over Iran’s nuclear program, trade relations between Iran and the European bloc assumed a downward trajectory.

As the EU took a similar position to the United States in imposing unilateral sanctions on Iranian banks, insurance companies and even cutting access to SWIFT, the impact on trade was clear. EU exports to Iran plummeted to 7.3 billion euros in 2012, down from highs of 11.3 billion euros in 2006.

In response, Iran began shifting the focus of its trade eastward, and thus expanded economic ties with countries such as China and India.

In 2013, moderate Hassan Rouhani, who had promised to end the country’s isolation through dialogue, was elected president. After the conclusion of the Joint Comprehensive Plan of Action (JCPOA) in July 2015, many Europeans from various industries including aviation, telecommunication, automobile, agriculture and energy have visited Iran, and many contracts worth billions of euros have been signed.

Indeed, during her April 16 visit to Tehran, Mogherini specifically stated that the EU needs its banks to be present in Iran. As such, the bloc is making efforts to reassure European banks about engaging with the country. In this regard, Iran and the EU have also agreed to broaden bilateral cooperation in various fields, including trade and investment, agriculture, transport and energy.

To be clear, interest in the expansion of ties between Iran and the EU is not only limited to the Europeans. Iranian authorities have also time and again spoken of their country’s willingness to expand relations with the bloc. “Expansion of ties with EU states is among Tehran’s policies. The post-JCPOA era must be used for development and job creation in the country,” Rouhani said before departing for Italy and France in January.

As Iran eyes foreign investment to revive its economy, officials estimate that the country can absorb over $50 billion in foreign investment a year.

Attracting foreign direct investment from Europe would help the Rouhani administration to achieve its stated objectives of boosting Iran’s private sector, liberalizing the economy and further diversifying it away from dependency on oil. Such a partnership would also serve the country’s long-term interests, because it will prevent Tehran from being a mere consumer and thus decrease its dependency on the bloc.

In an interview with Al-Monitor, Charles Robertson, global chief economist at Renaissance Capital, said he expects that among European countries, France, Germany and Italy will be leading investors in Iran in the years to come.

“Iran historically had very close links to Europe — from French retailers to UK defense equipment. Since 2014, there has been a constant stream of European companies visiting Iran hoping to trade with and/or invest in the country,” Robertson told Al-Monitor.

He said, “In the 1970s, Iran was one of Carrefour’s top three global markets. Already we have seen European banks opening up to Iranian banks. We expect European industrial firms to follow suit.”

Yet while senior Iranian and EU officials have expressed a mutual desire to expand ties, several obstacles remain. Remaining US banking sanctions are hampering trade between Europe and Iran, non-Western countries are intensifying their efforts to expand their market share in Iran, and there are also the reported efforts by Saudi Arabia to deprive Iran from the economic benefits of the JCPOA. 

A European diplomat who spoke to Al-Monitor on condition of anonymity further reiterated that Iran and the EU can now restore their commercial ties — but not without bumps in the road.

“Re-engagement with Iran will certainly create opportunities on both sides in terms of trade and investment, but change will come only progressively and results cannot be expected overnight. Ambitious Iranian projects will require the support of international investors, but European [and international] investment firms still need time to adjust their plans to the new situation and assess the new legal provisions.”

As such, despite the nuclear agreement, it appears that the EU is months if not years away from becoming Iran’s largest trade partner once again.