Nuclear-related sanctions on Tehran could be lifted by the end of the year. Investors around the world are preparing for the moment, but is Iran ready?
- The day Irans sanctions will end is named Implementation Day. Some are calling it I-Day, a new start for Tehran
- The deal has opponents in Iran, but the majority of the population seems to want sanctions gone as soon as possible
- Iran has the worlds largest reservoir of natural gas and the fourth-largest oil reserves, as well as the Middle Easts second-largest economy
- What Iran does not have is the compelling message that will prove irresistible to investors and traders in the new conditions that will apply on I-Day
The excitement about the prospect of an end to nuclear-related international sanctions against Iran is entirely justified.
If the process proceeds as smoothly as it could, they could be removed before the end of the year.
The day Irans sanctions will end is named Implementation Day. Some are calling it I-Day, a new start for Tehran, when the UN, the US and the EU will lift trade and finance restrictions that have battered the economy of the Islamic Republic since 2006.
I-Day can only be announced after the International Atomic Energy Agency (IAEA) has found Iran compliant with the conditions of the Joint Comprehensive Plan of Action (JCPOA), agreed in July. On 25 August, IAEA director-general Yukiya Amano said he will deliver a report setting out the agencys final assessment of possible military dimensions to Irans nuclear programme no later than 15 December. Irans leaders hope this happens sooner than that. So it is possible I-Day could come before New Years Day 2016.
The most immediate next date is 7 September 2015, Labour Day and a public holiday in the US. Congress is due to vote immediately after on a resolution disapproving the nuclear deal. It will almost certainly pass in both the Senate and the House of Representatives. But President Obama Barack will veto the resolution and that can only be overridden if a two-thirds majority in both vote to overturn the presidents ruling. That is possible in the House, but the latest calculation is opponents will only get 60 of the 67 votes they need in the Senate.
It may not even get to that point. Democrats are reported to be planning to filibuster the motion out of time in the Senate.
The virulent congressional opposition is already sounding like a partisan struggle between the Republican Party, which mainly rejects the deal, and the Democrats, which mainly do not.
Irans government has practically no debt, and the country could record a current account surplus in 2016
Elsewhere, the JCPOA looks unstoppable. The resolve behind the most comprehensive international sanctions programme ever attempted started to dissolve the moment the agreement was announced on 14 July. In the week when Congress is expected to vote on it, Tehran will host the president of Austria, Heinz Fischer, and a business delegation numbering more than 200 people. Fischer will be the first EU head of state to have visited the Islamic Republic since 2004.
The deal has opponents in Iran, but the majority of the population seems to want sanctions gone as soon as possible. They have made every Iranian poorer. But none have lost more than property-owners with money in the bank, which has been eroded by the two-thirds fall in the value of the rial against the dollar since 2011 and inflation, which is still running at 15 per cent a year.
The macroeconomic picture, on the other hand, is more mixed. Excluded from international finance markets that Tehran anyway scorned, Irans government has practically no debt, the budget deficit is modest and the country could record a current account surplus in 2016 even if oil prices remain at the levels seen at the end of August.
Local companies have replaced foreign suppliers that withdrew from Iran after 2011. The latest phases of the South Pars gas field development programme have been completed by Iranian contractors. Local manufacturers, including the Middle Easts largest motor vehicle industry, have learned how to make their own spare parts. In 2014, Irans import bill was almost exactly matched by the value of its non-oil exports.
And then there is the financial windfall. Obama said on 28 August that $56bn in Iranian net frozen assets will be released, although not on I-Day. This will complement foreign exchange reserves accumulated during 17 years, when austerity contained import demand and allowed the Islamic Republic to record a current account surplus every year since 1998.
The macroeconomic position is far from flawless. The depreciation of the rial since 2011 has produced the mind-boggling situation where you have to have rials by the million to pay for a night out with friends. A taxi fare across Tehran costs IR300,000 ($10). Most Iranian banks are technically bankrupt. The Central Bank of Iran says about 15 per cent of their loans are non-performing, but the scale of losses buried in bank balance sheets is believed to be much higher.
Iran, nevertheless, will be one of the worlds most creditworthy nations on I-Day. Tested to breaking point by revolution, invasion, isolation and sanctions, its economy has been proven to be literally bomb-proof. Nothing peace can bring can match what Tehran has survived over more than 36 years. The government is preparing to restore relations with the principal credit rating agencies and should be assigned sovereign ratings comfortably above investment grade.
They have barely thought about what happens on I-Day+1, when Iran becomes just another market
The good news for potential investors is that oil production and exports could be swiftly increased by at least 600,000 barrels a day (b/d). Spare capacity caused by sanctions should allow manufacturing output to grow by 30 per cent in two years.
The depreciation of the rial has made Iranian goods and services globally competitive. The reconnection to the SWIFT electronic payments system, which could happen immediately after I-Day, will remove one of the biggest impediments to trade with the Islamic Republic. The countrys retail and hospitality sectors are expected to boom.
This suggests that a rise of at least 10 per cent in the dollar value of Irans GDP is almost certain. Iran will probably be the worlds fastest-growing economy in 2016 and has the capacity to keep growing strongly for the indefinite future. Tehran is determined to recover to its pre-sanctions oil export level and eventually regain its share of global crude markets. There are also plans to lift gas exports to 100 billion cubic metres a year within a decade. If it is well managed, Iran could overtake Saudi Arabia to become the Middle Easts largest economy by 2030.
Most of the technical factors look potentially positive. But how do the people who have largely forgotten what normality is become normal once more?
I-Day could be only 20 days from now, which is no time at all, says an international businessman familiar with the Iranian economy. Everyone has been caught up with the daily struggle to survive and the uncertainty about the nuclear negotiations. They have barely thought about what happens on I-Day+1, when Iran stops being special and instantly becomes just another market, albeit one with great potential.
Enthusiasts say Iran has the worlds largest reservoir of natural gas and the fourth-largest oil reserves, the Middle Easts second-largest economy, 80 million mainly literate people, a strong scientific tradition and a substantial farming sector that has made the country selectively self-sufficient. It has a diversified manufacturing sector, including the regions largest automobile industry, which has learned through necessity to make its own components rather than import them.
This is all true. But what Iran does not have is the compelling message that will prove irresistible to investors and traders in the new conditions that will apply on I-Day. The country has lost the capacity to speak and behave in the way potential foreign partners will find comprehensible.
Even critics of the Iranian regime are bitter about the way Iran has been singled out for harsh treatment by longstanding trading partners. There are more nuanced views. Irans oil and gas industry is essentially orientated to US standards, technology and methods. There is a massive well of positive feelings towards America that is partly shaped by the millions that have family members living in the US. This will allow US companies to return to Iran, but few are ready to issue an invitation let alone ask for favours from a nation that has reviled their country for so long.
Perhaps the ultimate perversity is that sanctions, which slashed the living standards of the entire population, have dealt particular damage to the self-confidence of liberal-minded people from the middle class, who most fervently backed President Hassan Rouhani in the 2013 presidential poll and his reforming predecessor, Mohammad Khatami, who was head of state in 1997-2005. These are the ones in whom so much hope has been invested as a force that will force Iran along a new path. But they have been weakened. In contrast, the government has become richer and stronger. Its determination to defend the values of the 1979 revolution is still formidable.
The ending of sanctions will not immediately release the grip the past has on the attitudes of today. It will also take clear evidence that the US and the rest are ready to change irreversibly. There is reason to believe this can happen, although it will take time. But where the hearts and minds of the Iranian people will now turn cannot be so easily forecast.
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