Iran’s Economy: Fading Hope

Courtesy of The Economist, another look at Iran’s economy:

TO TEHRAN’S businessmen, they are known as the tea-ceremony set: foreign day-trippers sizing up the bounty that could be on offer if Iran’s supreme leader, Ayatollah Ali Khamenei, takes the plunge and backs a conclusive nuclear deal with the West. The number of businessmen entering Iran surged once before, after an interim deal with six world powers was struck in November 2013, raising hopes of a windfall for investors.

With a population close to 80m and the world’s 18th-largest economy, Iran could be an attractive market. Hassan Rohani, its outward-looking moderate president, argues the case for foreign investment and the jobs it could create. Yet his hopes of opening up the economy are stymied not just by sanctions and the elusive hope of a deal that would lift them. He also faces strong opposition from hardliners in Tehran, many of whom bridle at the notion of foreign companies on their turf. And time is not on his side. Iran’s economy is suffering from the effects of sanctions, a plummeting oil price and decades of mismanagement, not to mention the cost of funding militias and dictators in the region. Youth unemployment is rising and living standards are falling.

The president’s team of technocrats has had some successes and stanched the economy’s heaviest bleeding. On February 11th, in a speech to mark the 36th anniversary of the revolution, Mr Rohani said the economy had grown at an annual rate of 4% in the six months to September, pulling it out of two years of recession. Inflation, once around 40%, is now below 17%.

Yet many of these gains are now at risk because of low oil prices. Although Iran’s economy is less dependent on the black stuff than some others in the region, it still accounts for 42% of government revenues. The latest budget will cut spending by about 11% after inflation, potentially tipping the economy back into recession. Even this looks optimistic: it was initially based on an oil price of $72 a barrel. “It’s not a question of whether the government wants to do business with us,” says a European businessman. “The problem is that they no longer have any money to pay.”

The squeeze on government revenues is setting Mr Rohani on a collision course with Iran’s powerful Revolutionary Guards. The military force that underpins Iran’s clerical regime has a sprawling commercial empire. With their control of seaports and multiple land borders, guard commanders have become rich sanctions-busting traders, dabbling in industries from telecoms to banking. When Mr Rohani speaks of the need for “monopolies” to pay their taxes, people know exactly who he means. “It was impossible to make any money,” says Mehrdad, an Iranian-American who recently shut his stationery store in Tehran and moved back to California. “When the Sepah [army] import from China and don’t pay any taxes, well, it makes guys like me unviable.”

American and European energy and banking sanctions continue to hammer business. The optimism that a nuclear deal would soon see sanctions lifted has largely evaporated. Domestic investment has stalled. Several state-owned banks are said to be close to collapse. Efforts to circumvent sanctions have made an already corrupt country worse: Transparency International, a Berlin-based anti-corruption lobby, ranks Iran a lowly 136th out of 175 countries in its index for 2014.

Foreign business visitors continue to pop in for tea, but the numbers have dropped sharply in the past quarter, according to a European airline manager in the capital. Other indicators also suggest that hope is fading: the Tehran stock exchange slipped 21% last year after surging by 131% in 2013. Almost the only bright spot is tourism, with numbers up by 35%, according to the government’s latest figures.

Mr Rohani has placed much store on the nuclear talks, but his officials seem to be hedging their bets. Until recently many said they wanted to do less business with China—which has happily kept on buying oil—saying it makes shoddy goods, breaks its promises and lacks Western technology. Now such criticism is rarer.

American officials, for their part, are diligently tightening the screws. When a large delegation of French businessmen returned from Tehran last year, many were warned by the American embassy in Paris that they should tread carefully and not sign preliminary contracts in Iran if they wanted to retain access to American financial markets. A group of Germans received a similar warning a few months later. The thought of having their dollars frozen under American banking sanctions, or of being locked out of America’s capital markets altogether, has cooled enthusiasm for doing business in Iran.

Yet some foreign businessmen moan that American companies are not playing by the same rules. Rather than operate openly in Iran, many American firms are busily using local front men. One such middleman in the oil and banking business, who is a frequent visitor to Iran’s oil ministry, says prime contracts have already been snapped up. “If there is a nuclear deal, you will find overnight that the Americans have signed one-year options on the best projects,” he says. “The Europeans will be queuing up, but they will end up negotiating with Exxon Mobil and Chevron, just as happened in Libya.”

Such talk is particularly galling to companies from Western countries that were reluctantly pulled into applying sanctions. “We can’t help but think we have been played by the Americans,” says one European business leader.


This entry was posted on Sunday, March 8th, 2015 at 6:13 am and is filed under Iran.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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