The speculation is over. Iran and the world powers have reached a deal on Iran's nuclear program that could potentially remove the main sanctions against Iran by early 2016, allowing it to normalize trade, financial and investment relations with other countries. Although Iranian-US trade relations will not be sanctions-free in the foreseeable future, the situation could feasibly return to the one in the 1990s and the early 2000s with limitations on US companies doing business in Iran, but relatively open business relations with the rest of the world. As an integral part of the deal announced July 14 in Vienna, Washington will lift the secondary sanctions on companies in third countries doing business in Iran. The deal also addresses the situation of subsidiaries of US companies, paving the way for the engagement of subsidiaries with non-US-majority shareholding.
There is no doubt that post-sanctions developments will lead to a positive economic outlook in Iran. Despite the positive developments, unemployment will remain a major challenge for the Iranian government, so dedicated efforts must be made to create jobs and generate economic momentum. Although a number of nuances and legal processes will shape the new relationship between international companies and Iran, the Iranian economy nonetheless faces a new, unprecedented situation: Iran has invested heavily in industrial capacity to compensate for the gaps created by the sanctions, but post sanctions, these industries will have to operate in a completely different environment. On the one hand, their interactions with international trading partners will be free of previous limitations, but on the other hand, they will face international competition in Iran.
When trying to gauge the government's actions in the aftermath of the nuclear deal, it is important to understand that the top leadership remains committed to the “resistance economy.” This concept focuses on domestic capacity building and investment in the infrastructure needed to promote domestic industries, especially those with export potential. This means that investments in infrastructure as well as empowerment of domestic industry will likely be top government priorities.
Some domestic players are concerned about the anticipated opening of the Iranian market. Yahya Ale-Eshagh, a powerful businessman and former head of the Tehran Chamber of Commerce, opined well prior to the nuclear deal, “Post sanctions, domestic production will have to be managed in a way that it remains competitive. It is clear that there will be a rush on the market due to the needs, pricing and competitive environment, and if that rush is not controlled, it will harm the domestic industry.”
His remarks reflect a sense of vulnerability that the government will have to take into account. Nonetheless, while a large number of Iranian enterprises have not experienced open competition in the Iranian market, they appreciate that the growing presence of international companies stands to help domestic producers improve quality and become more international. Furthermore, the lifting of sanctions will reduce transaction costs for imports, as trading and banking routes will be direct, rather than through third countries.
All in all, the opening of the Iranian market that could follow the lifting of sanctions will produce opportunities as well as threats for Iranian industry. Considering that unemployment has been President Hassan Rouhani’s main priority, and that a negative impact on domestic industry will affect the job market, the government needs to develop a set of policies to protect local industry while also allowing international businesses to re-enter the vast Iranian market. The cornerstones of such a strategy could include the following.
- Pacing import volume — During the past few years, the government has had the objective of balancing Iran’s non-crude exports and non-petroleum imports. In fact, experts expect that this balance will be achieved in the current Iranian year, which began March 21. Majid Reza Haeri, head of the Committee on Imports at the Tehran Chamber of Commerce, believes that the government should continue to contain imports, adhering to this path for two years, until a new balance is established in the economy.
- Settling government debts — The Iranian government owes considerable sums to Iranian industry and banks. There are estimates of debts amounting to 940 trillion rials (approximately $31 billion) to subcontractors and 1,040 trillion rials (approximately $35 billion) to the banks. The government should settle these old debts to empower banks to extend loan facilities to industry and also to allow enterprises to utilize a larger pool of funds to become more competitive in an increasingly integrated Iranian economy.
- Promoting domestic investment — Mehdi Behkish, economist and president of the Iranian branch of the International Chamber of Commerce, believes the government should promote domestic investment prior to the lifting of sanctions. Behkish said, “The only path to job creation is investment. To achieve broad investment, we need to encourage domestic investors first, then Iranians residing abroad and finally foreign investors.”
- Managing Iranians' expectations — The government faces the challenge of tempering popular expectations that the lifting of sanctions will quickly and fundamentally transform the economy. While there will be psychological and practical benefits, the process of economic adjustment will be slow, especially in generating employment. Officials will need to manage expectations and communicate openly about the reforms and processes taking place to benefit from the lifting of sanctions and the return of international business.
- Developing strategies to highlight Iran’s competitive advantages — Among the main drivers for domestic and international investors are a country’s competitive advantages. In the case of Iran, both its human and natural resources are considered critical competitive advantages, but legal and structural reforms will be needed to clarify how private-sector investors (domestic and foreign) can benefit from these advantages. For example, it must be clarified at what price Iranian gas will be made available to investors in gas-related industries. Furthermore, clear strategies in such key sectors as hydrocarbons and mining will be needed to translate the enormous potential into job-creating investments.
- Investing in basic and advanced infrastructure — The unfolding of the Iranian economy’s massive potential will depend heavily on the availability of essential infrastructure. Hadi Haghshenas, an economic expert, believes that all transportation infrastructure — ports, roads, airports and railways — require major upgrading investments. Indeed, the government's investment in infrastructure projects will not only lay the foundation for additional investment by non-governmental sectors, but also generate jobs in the construction sector with a significant multiplier effect on the economy.
- Defining the roles of semi-state institutions — One of the issues the private sector has faced is the increasing presence of companies affiliated with military, revolutionary and religious foundations in the economy. Rouhani has tried to encourage such semi-state companies not to compete with the private sector, but the reality is that clear boundaries will need to be established to reduce the likelihood of uncompetitive practices in the market.
As can be seen, the lifting of sanctions will present the Iranian government with a number of challenges that need to be managed. The good news is that there is a capable team of experts in place to address them. The government, however, should be careful not to allow itself to become overwhelmed by the diversity of tasks and challenges. Furthermore, all of the above strategies can only be effective if the necessary economic, legal and structural reforms are also introduced and implemented accordingly.
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