The Geneva joint plan of action envisages limited, temporary and revisable sanctions relief that will remove restrictions on some of Irans most important industrial sectors.
Aside from allowing Tehran access to $4.2bn of foreign exchange holdings currently frozen as a result of sanctions, there will be limited relief targeted at the petrochemicals, automotive and aviation sectors, which will have a value of up to $1.5bn.
Despite the relief granted to these sectors, the Obama administration in the US does not want to signal that these sectors are now open for business. There are practical reasons why the targeted sanctions relief intended as a taster of the potential economic fruits that might result from Irans good behaviour is unlikely to yield a rush of deals in sectors such as automotive and petrochemicals.
The concern for foreign companies is that if they overextend themselves in anticipation of future deals in Iran, they could find themselves exposed to significant liabilities if the process does not go to plan.
Irans ability to take advantage of the limited sanctions opening on offer via the P5+1 deal will be constrained by commercial realities on the ground. The banking sector is still off limits to Iranian industrial groups. Meanwhile, the main port operator Tidewater, reported to be controlled by affiliates of the Islamic Revolutionary Guard Corps (IRGC), remains subject to sanctions. This places obstacles in the path of the export and import of automotive and aerospace parts, and petrochemical products.
Irans chances of engineering a fast-track increase in petrochemicals production are limited
Despite the tough words from US officials including David Cohen, the US Treasury undersecretary for terrorism and financing who has been emphasising to the global media that Irans economy will feel continued pain over the next six months local analysts argue that major economic sectors will nonetheless feel the positive impact from the sanctions relief. For example, the US has made a serious commitment to creating a banking channel for legitimate business in Iran, says Bijan Khajehpour, managing partner at local consultancy Atieh International.
A lot of sectors that were not subject to sanctions, such as pharmaceuticals, were still affected by banking sanctions, he told a meeting in London on 12 December. Now at least there is a desire to create a clean banking channel for trade with Western countries.
According to Khajehpour, government policy is intended to focus on export-led growth and empower more Iranian firms to export. That will require partnerships with foreign companies, and the next six months will be about establishing contacts with potential investors rather than signing and sealing contracts. Few foreign corporates are ready to commit to long-term strategies for investing in the Islamic Republic.
Even if the current plan leads to a lifting of sanctions, Irans sizeable industrial base has other challenges to deal with. According to the Washington-based IMF, large-scale subsidies and inefficiencies have limited the countrys ability to further develop its non-oil economy.
The changes resulting from the Geneva deal will primarily affect three key sectors: petrochemicals; automotive; and aviation.
The petrochemicals sector is a mainstay of Irans industry, accounting for more than half of the countrys industrial exports. The lifting of sanctions under the P5+1 agreement should enable Tehran to export an additional $1bn-worth of products over the envisaged six-month period, although state-owned National Petrochemicals Industries Company (NPIC) has continued to sell products to key buyers such as China in recent years.
In the first half of 2013, Iran produced 38.3 per cent fewer cars than in the same period in 2012
Sales of products such as polyvinyl chloride, polyethylene, acrylonitrile butadiene styrene, polypropylene and polyester in the March-September 2013 period reached $5bn, according to official figures quoted by French news agency AFP. Asia is the prime market for Iranian petrochemicals, with about a quarter of its exports going to China and another 13 per cent heading to India.
Iran is a significant ethylene producer, founded on the ready access to plentiful supplies of cheaply priced ethane feedstock. The country has commissioned five new large-scale ethylene crackers since 2005 and now has the capacity to produce 6.8 million tonnes a year (t/y) of ethylene, representing 4.5 per cent of global capacity.
NPIC is regarded as one of the more efficient branches of the Iranian industrial economy, and has managed to raise production and exports despite increasingly tight sanctions over the past couple of years. According to US-based consultancy Alembic Global Partners, Iranian petrochemicals exports rose from $7.8bn (10.5 million tonnes) in 2011 to an estimated $13bn (17.4 million tonnes) in 2013.
Sanctions on the petrochemicals industry were tightened in the 2011-12 period, following two US executive orders one in 2012 ushering in sanctions against financial institutions that facilitate transactions for buying chemicals products from Iran, and another that set limits on sales and support that could support the countrys ability to maintain or expand petrochemicals production.
Despite rising output, the sanctions have had a dampening impact on Irans petrochemicals sector, discouraging foreign investors. Earlier this year, South Africas Sasol sold down its 50 per cent interest in the local Arya Sasol Polymer Company, a joint venture that had planned to produce 400,000 t/y of ethylene and 600,000 t/y of polyethylene.
Most of Irans current fleet of planes are old and the components are no longer manufactured by Airbus and Boeing
Fariborz Ghadar, Centre for Strategic and International Studies
The sanctions have also had a deadening effect on petrochemicals exports. Although Irans petrochemicals sector saw production increase 6.4 per cent to 42.7 million tonnes in the 2011/12 Iranian year, exports rose just 1.9 per cent, compared with a 27.2 per cent increase in 2010/11 (before the embargoes kicked in).
The 24 November nuclear deal should still yield an improvement in the sectors fortunes, and NPIC is eager to capitalise on the relief in the sanctions regime. In a statement, the company said it is ready to boost petrochemicals cooperation with countries across the world.
However, analysts point out that the chances of engineering a fast-track increase in petrochemicals production are limited.
Iran has been exporting petrochemicals in an opportunistic manner in the past couple of years and nothing is going to change that significantly in the next six months, says Fariborz Ghadar, senior adviser to the Washington-based Centre for Strategic and International Studies.
Irans automotive sector is likely to feel the biggest impact from the Geneva deal and has also been the fastest to react. Within days of the 24 November announcement, an international automotive industry conference was held in Tehran, with high-level foreign representation.
Executives from French car giants Renault and Peugeot met with Irans industry minister, Mohammad Reza Nematzadeh, at the fair, with talks focusing on how to renew cooperation, launch new models and return to 2011s production levels of cars assembled in Iran from imported knock-down kit.
The easing of sanctions could provide Iran with $500m in lost trade over the six months, and with large manufacturers such as Peugeot, Renault and South Koreas Kia already shifting large volumes on the domestic market, there are opportunities to register some significant sales increases. According to Khajehpour, Renault sold more cars in Iran in 2011 than it did in France. The potential is there and these carmakers want to reconnect to the Iranian market, he says.
Peugeot will be the main beneficiary from the easing of sanctions, ahead of Renault. The Peugeot Pars model is the countrys second-highest selling vehicle (behind the locally-manufactured Saipa Pride), with a 14 per cent market share. According to the Iran Vehicle Manufacturers Association, 172,937 Saipa Prides were sold in the year to October 2013, ahead of the Peugeot Pars at 70,228.
However, these production figures are well down on the pre-sanction years. Peugeot, which sold nearly 500,000 cars in Iran in 2011, was forced to halt the export of kit in January 2012. Renault, which sold about 100,000 cars in the country in 2011, was also hit hard by the banking sanctions. In the year to October 2013, it sold only about 37,000 units of its Tondar 90 model.
Irans automotive sector has been steadily starved of equipment and components ever since the advent of sanctions. Before the sanctions, total car production reached 1.6 million in 2011. Since then, production has fluctuated between 500,000 and 900,0000 units.
The most recent figures from the OICA, the international motor manufacturers federation, reveal a sharp fall in output this year. In the first half of 2013, the Islamic Republic produced 38.3 per cent fewer cars than in the equivalent period in 2012, at just 310,600 units.
Although primarily domestically focused, some of Irans car exports have reached neighbouring markets such as Iraq and some of the Central Asian republics. Iran Khodro, which makes the Samand model, exported 222,000 units to global markets in the seven years between 2005 and 2012. This has not gone unnoticed in Paris and Seoul; for large global automakers such as Peugeot, Renault and Kia, Iran could eventually serve as a production base for the Asian market.
The P5+1 deal is encouraging for Iran-based automakers, which are set enjoy better access to technology and parts they have been forced to import via third parties over the past couple of years.
However, Iranian car manufacturers have enjoyed only limited success in establishing production centres outside the Islamic Republic. Iran Khodro has sought to invest in an automotive manufacturing presence in Venezuela a country with strong ties to Iran via a joint venture, Venirauto. The firm started assembling the Samand saloon and the Turpial hatchback in 2006.
In dire need of new aircraft and components, Irans aviation sector is hopeful of an improvement in fortunes as a consequence of the Joint Plan of Action agreed on 24 November. The deal authorises the supply and installation of spare parts for Iranian civil aviation for safety of aircraft, safety-related inspections and repairs in Iran, as well as associated services. This would apply to flag carrier Iran Air and other local airlines not subject to specific sanctions.
Sanctions have prevented local airlines from acquiring new planes from the two main global providers, Frances Airbus and the US Boeing. New acquisitions have had to go through circuitous routes on the second-hand market, some of which have incurred legal action from US authorities. Nonetheless, such purchases have enabled airlines such as the privately owned Mahan Air to acquire Boeing 747-400s in recent years, while Iran Air which owns 51 planes has acquired a handful of Airbus A320s, although the restrictions on component sales has limited their effectiveness.
The 24 Airbus aircraft added to Irans fleet from the beginning of the current Iranian calendar year on March 21, including three Airbus A320s, was three more than the 21 aircraft imported in the 2012-13 year, Hamidreza Pahlevani, former head of Irans Civil Aviation Organisation, was quoted as saying by the Iranian Students News Agency.
Sanctions have had a deleterious effect on the aviation sector, leaving a legacy of outdated planes and a dearth of critical parts. The average age of Irans fleet is 22 years. It is no surprise then that at any one time, an estimated 60 per cent of the countrys commercial fleet is offline due to maintenance issues.
Embargoes targeted at the aviation sector have been rigorously enforced. In May 2013, Washington allowed three non-US firms for providing aircraft and equipment to the blacklisted Mahan Air and Iran Air.
The Geneva deal has enabled the aviation industry to start thinking seriously about expansion. It has set an ambitious goal of more than doubling the size of its commercial aircraft fleet to 550 by 2025 and expanding the aerospace parts industry to $500m by 2017.
There are plans under way to develop locally manufactured jets as well as to obtain manufacturing licences for other aircraft models including the Chinese Comac C919 and the Russian Irkut MC-21.
The spending requirements in order to realise these ambitions are eye-watering for a country that cannot access nearly $100bn of its own foreign reserve holdings. Iran needs to add 30 planes a year to its fleet, says Alireza Jahangiri, head of the Civil Aviation Organisation, at a potential cost of at least $1bn a year.
According to Ghadar, as a result of the new deal, Irans airlines will find it easier to obtain components. But there are some serious challenges to overcome.
Most of the current fleet of planes are old and the components are no longer manufactured by Airbus and Boeing, he says. This means they have to scratch around and find older aircraft that they can dismantle.