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    January 19, 2016

    Iran Without Sanctions: Five Consequences for the World Market

    Translated by Ollie Richardson for Fort Russ
    19th January, 2016

    The abolition of international sanctions gives Iran the green light to resume large-scale trading relations. What does this mean for the global economy and Russia? The answers are in the following DW material.

    After Saturday night, January 16th, the EU and the US announced the lifting of sanctions against Iran relating to the implementation of its nuclear programme, with many Russian and Western companies beginning to calculate the possible gains from cooperation with the Islamic Republic. The cancelation of trade and financial restrictions, which have operated for almost ten years, will spur the growth of the Iranian economy in the next two years thanks to the resumption of trade relations, something noted in the review of World Bank economists.

    Foreign companies are promised billions of dollars in contracts, although not all will get them: the competition in the Iranian market will be huge, analysts say. DW highlighted five key changes that will occur in the global market after the lifting of economic sanctions against Tehran.

    Iran returns to the market of raw materials

    The international sanctions have been removed, and the ban on imports of Iranian oil cancelled, which have been in effect since 2012. Prior to the imposition of restrictions, the Islamic Republic produced about 3.7 million barrels of oil per day, of which 2 million were exported. The Iranian authorities have ordered to increase production by 500 thousand barrels per day in the next six months to raise it back to the previous rate. Many experts consider this as bad news for the oil market.

    In additional, due to the volumes of Iranian oil being exported, which are being poured into the market, the price of oil can be bought down even more, which already has reached a 12-year low, breaking the mark of $30 per barrel. In addition, Iran is now able to displace Russia in its key European market. Of the 500 thousand barrels of oil that the Islamic Republic plans to produce immediately after the lifting of sanctions, Europe may be sent about 200 thousand, indicates DW experts. Compared with Russia,  exporting 3.3 million barrels per day is a small volume, admits the analyst at "URALSIB capital", Alexei Kokin.

    However, the Iranians are likely to target the countries of southern Europe, where they will deliver heavy oil, directly competing with the Russian Urals, says Kokin. This can create future problems for Iranian exports to Germany, who are one of the main consumers of Russian oil, adds Yury Barmin, an analyst on the strategy of Russia in the Middle East. However, Valery Nesterov, an analyst on oil and gas at Sberbank CIB, believes that Iran is unlikely to quickly increase production: infrastructure is very worn and the repair requires long-term foreign investors.

    Foreign investment will flow in Iran

    With the tightening of international sanctions, foreign direct investment in the country gradually decreased and stopped altogether in 2012. According to World Bank estimates, in the next few years following the lifting of sanctions, the inflow of foreign direct investment to Iran will increase up to 3-3.5 billion dollars.

    Competition in the Iranian market will be huge, predicts Yury Barmin. He expects that major corporations will now literally pour into Iran, if the authorities will not create artificial barriers for foreign investors. However, Russian companies that have no funds available for investment are unlikely to be able to compete with them, says the expert: "I think the cooperation will be minimal."

    You can now deliver aircraft to Iran

    The aviation industry is one of the most promising sectors of cooperation, which has opened up for foreign companies after the lifting of sanctions. Russia has a direct interest here: the Corporation "Sukhoi Civil aircraft" is expected to supply Iran with about 100 Sukhoi Superjet 100 aircraft after the lifting of sanctions, and subsequently will localize the manufacture of spare parts for SSJ 100 in Iran.

    However, Tehran has apparently already outlined their priorities for cooperation in this industry. Last Saturday, the Minister of Roads and Urban Development of the country, Abbas Akhoundi, announced that Iran plans to buy 114 civil aircraft from the European aviation company Airbus.

    The Iranian fleet is in a critical condition and requires urgent
    renewal, says Yury Barmin. Therefore, according to him, it is still too early to draw conclusions about what Tehran has refused to cooperate with Russia in the aircraft industry. However, the localization of production is a long and expensive process, and this cooperation in the short term is unlikely, the expert said.

    Iran market opens up for the automotive industry

    An intention to return to the Iranian market has already been  stated by several German automakers. Among them is Daimler, who plans to supply Iran with trucks. BMW and Volkswagen announced that they are planning to first assess the situation, reported Reuters. There was no exception with Russian manufacturers. Sollers, who produces UAZ off-road vehicles, are preparing trial supplies to Iran, the company told the newspaper "Kommersant". And in April, the Minister of Industry and Trade, Denis Manturov, said that AvtoVAZ, GAZ and KAMAZ are negotiating on the organization of assembly in Iran.

    The Russian cargo transport has a good chance in the Iranian market: it has a good reputation in the region and with Iran's weather conditions, explains Barmin. However, the Russian car industry as a whole will be less competitive in comparison with cheap technology from Asia, China and India, the expert added.

    Iran will return to the system of international payments of SWIFT

    The connection of Iranian banks to the international system of interbank messages exchange will make it easier for Tehran to make payments to trading partners and will contribute to the growth of mutual trade.
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