Iran must tread softly in making a return to international market

Greeks and Persians are friends again. On Friday, Hellenic Petroleum became the first European company to agree to buy Iranian oil since the lifting of sanctions, one of many businesses thirsting for opportunities in the country.

The success or failure of those companies hinges both Iran’s domestic politics and the policy of engagement.

Iran was never entirely out of the market, even during the period of most intense sanctions from 2012 up to the start of this year. But a welter of restrictions imposed by the US, UN and EU restricted oil sales, financial transactions, insurance and shipping. Iranian oil exports, that tumbled from 2.5 million barrels per day to a low of less than 1 million bpd, may now recover to more than 2 million bpd by the end of the year.

However, Iran faces a difficult external environment. Accounting for inflation, oil prices are at their lowest since 1999, and it is precisely the prospect of its higher exports that has led to the latest slump.

Even a partial realisation of Iran’s own plans will put further downward pressure on other commodities, such as petrochemicals. Numerous half-completed projects litter the coast around Assaluyeh, terminus for South Pars, the world’s largest gasfield, shared with Qatar. Only some will attract investors and technology, but this will still mean a major boost in output, largely overlooked by forecasters.

The government has hopes for mining, with the world’s second-largest copper mine, and the largest reserves of zinc, as well as iron and other minerals. But prices for metals are almost as dismal as for oil, as Chinese growth has slowed down.

The Iranian president Hassan Rouhani’s government has to tread carefully. Politicians need to capitalise on post-sanctions euphoria, ahead of February’s elections for the parliament and the Assembly of Experts – where reformists face a kind of pre-emptive hard-line backlash.

It is impossible to show any tangible economic results in that short time, so the best the pragmatic-reformist camp can hope for is a surge in Keynes’ optimistic “animal spirits”, buoyed by some headline deal-making.

Most of the reported US$100 billion of frozen funds Iran will now be able to access has already been allocated to domestic projects, recapitalising its banks and to foreign bills. In any case, bringing it home all at once would fuel inflation and excessive strengthening of the rial.

From 1992 to 2009, a period including relative economic openness under the presidents Rafsanjani and Khatami, Iran attracted $34.6 billion of foreign direct investment in total across all sectors. Now the energy sector alone is said to require $500bn over the decade to 2025. Even allowing for some internal funding, this suggests some $12bn to $32bn of foreign investment per year, not to mention the vast requirements in transportation, telecommunications, hotels, health care, environmental protection and many other areas.

The country will therefore inevitably fall well short of its ambitious goals. Even partial success hangs on attracting foreign investment. This involves the usual steps of improving transparency, corporatising state companies, and passing investor-friendly legislation. True privatisation – not the murky, undervalued sales to insiders that typified the Ahmadinejad era – can help to rebuild a constituency within Iran that is not dependent on government largesse, and benefits from constructive relations with the rest of the world.

But such a transformation is vulnerable to the grip of Revolutionary Guards-linked entities on key parts of the economy, and the chance for hardliners to blow up minor incidents into international crises. Its Gulf neighbours are understandably concerned about Tehran’s regional influence, and its continuing support for Bashar Al Assad’s murderous regime in Syria.

The regional states, as well as the Americans and Europeans, have to sail a perilous path – confronting Iran politically where it threatens, while building mutual benefits through diplomatic compromises and trade.

Robin Mills is the chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.

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