Rouhani's opportunity for economic reform

13 October 2015

Iran is preparing to increase crude exports and access frozen overseas reserves

In the two years since Hassan Rouhani was elected, the Iranian president has, after a few false starts, successfully navigated Tehran towards the end of a sanctions regime that has crippled the country’s economy.

While many chronic economic problems remain following the eight-year Ahmadinejad administration, Rouhani can use the lifting of sanctions as an opportunity for pushing through reforms to reap the full benefit of an expected wave of overseas investment in Iran.

The journey towards the suspension of sanctions is close to reaching its final leg as Tehran and the UN prepare for Adoption Day, set for 18 October.

Since the Joint Comprehensive Plan of Action (JCPOA) was signed in Vienna on 14 July, the process of implementing the agreement has been relatively smooth, with the US and Iranian leaders managing to pass support for the bill past hardline lawmakers.

Presidential efforts

Barack Obama faced strong opposition to the agreement from the Republican Party – which controls both Houses of Congress – but by 2 September, the US president had received the support of 34 senators, representing more than a third of the Senate.

This left Obama with enough backing to override any movement against the agreement by Republican senators and congressmen.

Rouhani, a relatively reformist figure within the Islamic Republic’s leadership, has also faced a tough task pushing the necessary legislation through the legislative branch. The Iranian parliament on 11 October passed the outline of a bill that will allow the government to implement the JCPOA.

When the bill is finally approved, it will allow Tehran to withdraw from the imposed limits on its nuclear development programme if world powers do not lift sanctions, according to the official IRNA news agency.

The bill did not receive overwhelming support, with 139 lawmakers out of the 253 present voting in favour of the bill against strong opposition from hardliners in the Majlis.

Nuclear slowdown

Iran is expected to start reducing its nuclear activities on 18 October – known as Adoption Day – to meet the requirements of the International Atomic Energy Agency (IAEA). Adoption Day comes 90 days after the endorsement of the JCPOA by the UN Security Council (UNSC), and will see the UNSC officially adopt the agreement.

 “So, starting on Adoption Day, about 18 October, we expect that Iran is going to need to make major changes to its Natanz enrichment facility,” said a senior US government official at a recent briefing on the process in Washington. “That will involve taking out thousands of centrifuges and putting them into IAEA-monitored storage.

“They also need to ship out to another country the vast majority of their enriched uranium stockpile,” said the official, adding that the Arak heavy-water research reactor is going to be pulled out and filled with concrete so it cannot be used again.

Adoption Day represents the final key date until Implementation Day, when the nuclear-related sanctions against Iran will finally be lifted.

The State Department is now preparing sanctions relief plans including waivers of nuclear-related sanctions legislation. An unidentified State Department official told a background briefing in Washington on 17 September that the waivers will not be effective until the IAEA verifies that Iran has taken all steps required by the JCPOA to reduce its nuclear capacity. Obama is expected to start issuing the first conditional sanctions waivers from 18 October.

Possible implementation

The IAEA board of governors is due to receive the final report on the agency’s review by 15 December. Some experts say it is possible that Implementation Day, which is when all nuclear-related sanctions imposed by the US, the UN and the EU will be lifted, could be before the end of the year, but many are anticipating the date in early 2016.

Relief from sanctions is expected to boost Iranian economic growth as the country is allowed to increase crude exports and will gain access to frozen overseas reserves. The Washington-based IMF, after a recent mission to the country, urged the government to push through reforms to boost macroeconomic stability and help economic growth.

“The agreement on Iran’s nuclear programme and the envisaged lifting of economic sanctions bring a unique opportunity to build on and broaden the achievements of the past two years,” said Martin Cerisola, who led the recent IMF mission to Iran.

“Prudent policies have allowed the economy to return to positive growth last year and to reduce inflation to about 15 per cent. The authorities have also regained stability in the foreign exchange market and advanced with subsidy reform.”

Targeting inflation

Rouhani has said the government is targeting a single-digit inflation rate, but must find a balance as Tehran’s monetary controls limit the country’s ability to bring the economy out of stagnation.

Despite the success in bringing down inflation, the Iranian economy faces severe structural challenges, the IMF added. Lower oil prices have slowed economic activity, while the banking system faces high non-performing assets that have resulted in unsustainably high interest rates and stagnant credit.

The IMF forecasts real GDP growth of 4-5.5 per cent for the 2016/17 year, driven by high oil exports, lower costs for trade and financial transactions, and restored access to foreign assets. Economic growth is expected to decline from 3 per cent in 2014/15 to between 0.5 per cent and -0.5 per cent in 2015/16, depending on the timing of sanctions relief, the fund added.

Iran signalled that it is pushing to normalise economic relations with other countries, with Finance & Economic Affairs Minister Ali Tayebnia welcoming the help of the Washington-based World Bank and the IMF when he addressed the opening ceremonies of annual meetings by the two organisations.

“After several years of problems in relations between Iran and the World Bank due to the sanctions, now it is time for Iran to benefit from financing of developmental banks,” he said, as reported in the Iranian press.

Welcoming investors

Rouhani has stressed that Iran will open its door to international businesses if they bring investment and technology into the country. The need for new technology is especially important in the country’s oil, gas and petrochemicals sectors, where limited access to process technology has prevented modernisation.

Tehran will be particularly keen to make use of gas liquefaction technology to establish liquefied natural gas (LNG) exporting infrastructure, which would allow it to capitalise more effectively on its vast gas resources.

The JCPOA by no means clears all the sanctions for international companies looking to do business in Iran, and this is especially pertinent for American companies and individuals.

At the MEED Opportunity Iran event in Dubai on 29 September, many investors cited the continuing sanctions regime as their main concern. US sanctions, related to human rights and support for terrorism, prevent any US person, including companies, from dealing or facilitating business with Iran. 

This will affect the efforts of other companies to conduct business in Iran. It will also having a dampening effect on opportunities for banks based outside the US with subsidiaries there, as well as lenders that rely on relationships with US banks for certain transactions.

Dollar assets

However, after Implementation Day, Tehran will be able to receive US dollars from entities outside the US, which will allow the Iranian government access to frozen overseas dollar assets. Under the nuclear-related sanctions, Washington had sanctioned any company providing Iran with US dollar bank notes.

Investors are also concerned about the possibility of nuclear-related sanctions “snapping back” if Iran violates the terms of the Vienna agreement on its uranium enrichment programme.

After Adoption Day, the next key date in the process is 15 December – the day when IAEA inspector-general Yukiya Amano must report his findings to the board of the UN nuclear watchdog.

After this, companies looking to do business in Iran will eagerly anticipate Implementation Day. Over recent months, government ministers from major economic powers including Germany, the UK, France, Italy, Japan and India have led business delegations to Tehran, and it is thought investment deals have been lined up to go through after Implementation Day.

This will be a watershed moment for Rouhani and he must use the opportunity to ensure the opening of Iran’s economy can bring in investment, but also jobs and economic stability for a country suffering for years under the harshest sanctions ever placed on a nation.

Although the country has long-term economic problems, the change should rightly come with a sense of optimism as Iran is given a fresh chance to meet its potential as a major emerging economy.

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