Iran Back in Business
Iran is moving quickly to shake off the effects of a decade of sanctions that have stifled its economy.
With a population of about 80 million and annual gross domestic product estimated at $406 billion, Iran will be the largest economy to reenter international markets since the fall of the Soviet Union, wrote the Financial Times.
But given the global economic slowdown, the drop in oil prices, China’s market gyrations and tougher banking regulations, how will Iran react and what might this mean for global markets and trade?
The boycott of Iranian oil caused the country’s crude output to fall from about 3.5 million barrels per day to a little over 2.5 mbpd by the end of 2015.
Shortly after sanctions were lifted, the National Iranian Oil Company moved to play catch-up, ordering an increase in production of about 500,000 bpd. As a result, Brent crude, down 75% over the past 18 months, slipped below $28 a barrel.
As chart 1 indicated, Saudi Arabia, the UAE and Iraq upped their production over the past four years and will guard their share of an already oversupplied oil market.
To attract buyers from Europe, Iran last month said it would sell its oil at discounted prices. Tehran’s move followed closely in the footsteps of rival Saudi Arabia, whose state oil company Saudi Aramco announced similar discounts earlier this month.
Think two words: price war.
Rewriting Trade Relationships
Although China’s slowdown has dented recent exports, Beijing remains the largest importer of Iran’s oil and Iranian officials reportedly intend to push more in that direction.
While China has grown into Iran’s most important export market, the Middle East is the country’s biggest source of imports.
Chart 2 shows imports from neighbors in the region outgrowing other parts of the world over the past decade, suggesting Tehran’s neighbors may suffer as imports from the EU pick up following the relaxation of sanctions.
The agreement by Airbus, the European aircraft maker, to sell over a hundred jets to Iran came as President Hassan Rouhani became the first Iranian leader in more than a decade to visit two European states in a single trip. The deal suggests EU exports to Iran will grow.
Back to Business
With sanctions gone, Iran hopes to attract up to $50 billion of foreign investment annually. International companies are readying to explore opportunities, but will they be willing to risk engaging with an economy that has been inward-looking for over a decade?
While data are scare, chart 3 shows declining levels of investment in Iran by foreign companies over the past decade.
Iran’s stock market is poised to receive more investment. Griffon Capital, an asset manager, launched a general equity fund last week, the second of its kind, aiming to raise €100 million for investing in Tehran Stock Exchange and Iran Fara Bourse, a derivatives exchange.