In Iran, Do Economics Offer Hope?

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Assuming a clear and acceptable agreement regarding Iran’s nuclear ambitions can be reached, the potential for foreign firms looking to invest in what has, until recently, been America’s arch-enemy is considerable. Indeed, according to an Economist article western firms are already beginning to do limited business with Iran in order to position themselves for the anticipated end to sanctions. Boeing said it had made its first sale to Iran since the Islamic Revolution in 1979, selling $120,000-worth of aircraft manuals and other data.

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Interestingly, although western firms pre-sanctions were most deeply involved in the manufacturing sector, Peugeot of France, for example, enjoyed a near 30% share of Iran’s automotive market before they left in 2012 due to sanctions. The commodities sector may hold the biggest potential opportunities for westerners looking to partner with local firms.

The natural gas market is a perfect example; although Iran has the world’s largest reserves it supplies just 1% of the global market, yet Asian buyers are actively seeking new suppliers. Iran has been starved of know-how in the form of the latest technology and funds for investment in gas collection, liquefaction and construction of export terminals, areas the west would be keen to participate in. Interestingly, miners are singled out by the Economist as another sector that could be an early target since much of the industry is already privatized, avoiding the bureaucracy of state enterprises. Iran has the world’s 9th largest copper reserves and the 11th in iron ore the report says, even though both commodities are currently in an over-supplied position and would require substantial investment to have any chance of making them globally competitive at current prices.

But massive challenges remain. Back to the car industry, car production, which used to account for 10% of GDP and employ 1 million people, fell by about 70%, according to industry sources quoted in another Economist article. A Mercedes-Benz factory in Tabriz that a few years ago was making 80 engines a day now produces just 2, inflation and employment have both been rampant these last few years and the economy which over the previous decade had been growing at an average rate of 5.1% a year dropped by 5.8% last year on top of a 2% fall the year before.

Although Iran is said to have the third-largest economy and most mature in the Middle East unemployment hit 50% last year, although it is recovering a little now. It has a large industrial base, an educated workforce and a service sector that in 2012 accounted for 52% of the economy, very western in profile but it also has far too much government oversight and involvement in the economy, not to mention numerous quasi-military enterprises owned by the Revolutionary Guards.

The Economist says Iran’s economy is so inefficient, corrupt and bloated that it was heading for a fall even before sanctions. Apparently, almost all Iranians receive cash transfers meant for the poor. Last year the state spent $100 billion on subsidies, a quarter of GDP. Until recently diesel cost the equivalent of 2 American cents a liter before the new administration pushed prices, now gas costs about 28 cents/liter or $1.08/us gallon. The economy is improving but it has a long way to go, for many westerners the levels of corruption and bureaucracy may deter investment for some years to come, but that would a shame. What Iran needs more than anything is to become part of the global family again, for young people to have jobs, for foreign firms to invest and for the revolution to be seen for the dreadful mistake that it was. At least there is hope the process has started.

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