On May 10, U.S. Secretary of State John Kerry prepared to discuss Iranian sanctions with leading members of the European banking industry in London. However, this time Kerry came, not to urge sanctions enforcement, but to reassure European banks that they are “absolutely free to open accounts for Iran, trade and exchange money, facilitate a legitimate business agreement, bankroll it, [and] lend money.”
In many ways, these words are symbolic of how far international – and especially U.S. – rapprochement with Tehran has come since the implementation of Iranian sanctions relief under the Joint Comprehensive Plan of Action (JCPOA), an international agreement concerning Iran’s nuclear program. However, they are also a sharp reminder that the nuclear deal was only one step on a long path toward normalized relations. A number of U.S. sanctions still remain in place and, as a tumultuous American election cycle reaches full steam, international banks and businesses remain wary of doing business in the Islamic Republic.
This reticence does not reflect any lack of opportunity. To the contrary, Iran is perhaps the world’s largest untapped market. At $388 billion, the country’s annual GDP ranked 29th in the world in 2015 – just ahead of Austria – and the International Monetary Fund (IMF) expects the economy to grow by between 4 and 5.5 percent this year, while the country’s national debt sits at an enviable 4 percent of GDP.
Iran also possesses the world’s largest natural gas reserves and the 4th largest oil reserves. Yet, unlike other major oil producers, their economy is highly diverse, boasting sizable manufacturing and agricultural industries, as well as a sophisticated financial sector with well-developed capital markets. Indeed, oil and gas production made up just 10 percent of GDP in 2015.
Large, young, and highly educated, the Islamic Republic is also a wealth of human capital. Sixty percent of the country’s roughly 80 million citizens are under the age of 35, 85 percent are literate, and women make up some 68 percent of new university entrants.
Unsurprisingly, international investors have been lining up to get in on the ground floor of this waking economic giant in the Middle East. Senior Fellow at the Middle East Institute and Cipher Brief expert, Alex Vatanka, writes that “since Iran signed the nuclear deal in July 2015, Tehran has seen a flood of foreign visitors. Nine heads of state, 16 foreign ministers and dozens of other senior officials…have come looking for diplomatic deals and economic opportunities.”
Major companies have joined the fray as well. In January this year, Airbus struck a deal to sell 118 new aircraft to Iran Air’s aging fleet while, in February, French automobile manufacturer Peugeot agreed to pay Iranian carmaker Khodro over 400 million Euros in sanctions compensation to revive their partnership.
Still, many are not convinced that the rewards outweigh the risks. The primary reason for this is that many U.S. sanctions remain firmly in place. As former Director of Multilateral Affairs for the National Security Council and Cipher Brief expert Adam Smith observes, “the vast majority of the sanctions that the U.S. changed were what you call secondary sanctions, which are sanctions that the U.S. had imposed on entities outside the United States.” Now that the JCPOA has been implemented, foreign entities – primarily European banks and companies – are free to do business in Iran, and the Islamic Republic has regained access to the SWIFT system of international financial transfers.
However, U.S. entities are still largely banned from doing business with, or providing dollar-clearing services to, Iranian companies due to unchanged primary sanctions related to issues like terrorism, missile development, and money laundering. Since the majority of international trade – especially oil and gas – is conducted through dollar transactions, these sanctions are especially limiting to international investment—a limit compounded by fears of reputational risk and the possibility that the U.S. might extend or even fully “snap back” secondary sanctions.
These difficulties have not gone unnoticed in Iran. In a speech marking Nowruz – the Iranian New Year – this March, Supreme Leader Ayatollah Ali Khamenei complained that “the U.S. Department of the Treasury acts in a way … that big companies, agencies, and banks do not dare to approach the Islamic Republic and have business transactions with it.” Secretary Kerry did confirm in April that Iran had received only $3 billion of the roughly $55 billion in frozen assets, which the U.S. estimates it should eventually be able to access.
Still, it is not entirely fair to blame all Iran’s woes on American restrictions. First, U.S. agencies have actually taken steps to alleviate the continuing sanctions burden, including issuing special licenses to allow U.S. persons to engage in specific business activities with Iranian companies. Second, the delay in international investment is not only the result of ongoing sanctions, but also a reflection of real concerns about lax regulatory standards and endemic corruption within Iran. The country’s banking system in particular has fallen far behind international anti-money laundering, counter-terrorist financing, and banking safety standards.
In short, the JCPOA was an agreement designed to remove a very specific set of sanctions, not a promise to usher the Islamic Republic back into the international system; and so far, that deal has been very good for Iran. The country has already increased oil production to 3.6 million barrels per day (bpd) in April and bumped oil exports up to 2 million bpd. Tehran has also signed a number of fat contracts and trade agreements with foreign partners, including a commitment from India to invest $500 million in Chabahar, Iran’s only deep-water port on the Indian Ocean. At the end of the day there is too much money on the table for international investors to pass up forever. Sanctions or no, as the Islamic Republic starts down the path to normality it is likely find more and more helping hands along the way. That is, as long as it adheres to the provisions of the nuclear deal.
Fritz Lodge is an International Producer with The Cipher Brief.
