Think of the following confluence of historical moments. On one hand, an important country goes through the intoxicating ‘high’ of opening after years of partial isolation. On the other hand, the price of its most important export commodity is at a ten year low. You guessed right: Iran and Oil.
After the lifting of sanctions related to its nuclear program, the regional power is freer to pump up the volume of its crude exports. But as we have noted in a special report titled “Iran: Back in the game?” and in an infogrpahic (see below) a question mark is hanging above what the new economic reality means for Iran - and world markets.
As multinational companies scramble to find a footing in the market and re-establish trade relations, it’s worth considering short and medium term opportunities and risks. Are we seeing a crack in the door or the gates are wide open?
The answer, as always, is ‘it depends’.
First, the economy is not an island and geopolitics matter. Individuals and groups categorised as sponsoring terrorism are still subject to U.S. sanctions – with potential impact for non-U.S. companies. Until the country’s newfound access to global payment systems becomes truly effective and broadly accepted internationally, corporates will find it problematic to conduct business with the country.
So the Iranian outlook is brighter, but not rosy. GDP is forecast to grow by 4% in 2016, but growth will remain below the pre-sanctions annual average of +5%.
Our analysis foresees a major impact on trade. Exports (especially oil) and imports are likely to soar by almost +20% in 2016, before decelerating slightly in 2017 to +11% for exports and +13% for imports.
Iran will have to ship in various goods and products to update its industrial technology and put smiles on consumers’ faces, worn down by years of restrictions.
Purchases of machinery and equipment could rise by more than USD4bn in 2015-2017. The hike in imports of manufactured articles will reach USD3.1bn, cars and vehicles USD2.7bn and electronic devices +USD1.7bn.
Which countries should benefit from the windfall?
European economies will be the big winners, thanks to additional exports of machinery and equipment, cars and trucks and agricultural food products. Germany could grow its exports to Iran by close to +USD2bn over 2015-17, followed by France (+USD1.3bn), Italy (+USD0.9bn) and the U.K. (+USD0.6bn). Even the U.S. will see its exports multiply fivefold (!), with total export gains slightly above +USD500mn.
Current key partners focused on higher-value added exports will also be big winners. The United Arab Emirates will continue to act as a re-export platform for products entering Iran and enjoy an exports increase to the tune of USD2.1bn in 2015-17. China’s export gains will reach USD1.8bn over the same period, and South Korea’s USD1bn. Expect to see some Korean cars roaming the streets of Tehran soon.
And who will pay a price? Turkey and Russia might lose market share to European competitors. After slowing in 2016, their exports to Iran could even decrease in 2017, notably in the fuels, chemicals, textiles and agri-food sectors.
So in the short term former and current key-partners (except Turkey and Russia) will benefit. However, the outlook is more uncertain beyond 2017. China, the UAE and South Korea will fight to keep the market share they have acquired since 2006.
The gates are opening, but only just.