Report

The Pot of Gold at the End of the Iranian Rainbow

Companies far and wide are drooling over the prospect of an opening to Iran. But doubts over the nuclear deal and the future of sanctions still dampen Tehran’s hopes for an early rehabilitation.

Iran's President Hassan Rouhani shakes hands with Turkish President Recep Tayyip Erdogan (R) during an official welcoming ceremony following the latter's arrival at the Saadabad Palace in Tehran on April 7, 2015, for an official one-day visit as the two countries criticized each other in recent weeks on their respective policies in the region. AFP PHOTO/ATTA KENARE        (Photo credit should read ATTA KENARE/AFP/Getty Images)
Iran's President Hassan Rouhani shakes hands with Turkish President Recep Tayyip Erdogan (R) during an official welcoming ceremony following the latter's arrival at the Saadabad Palace in Tehran on April 7, 2015, for an official one-day visit as the two countries criticized each other in recent weeks on their respective policies in the region. AFP PHOTO/ATTA KENARE (Photo credit should read ATTA KENARE/AFP/Getty Images)

Just one week after Iran and international negotiators reached a preliminary deal regarding Tehran’s nuclear program, countries around the world are knocking down Iran’s door and hunting for business.

China is in talks to buy more Iranian oil and to help build a natural gas pipeline from Iran to Pakistan, and it has invited Iran to join its new infrastructure investment bank. Turkish President Recep Tayyip Erdogan swallowed recent criticism of Tehran to visit Tuesday, April 7, and discuss future investment and expanded business ties. Even European firms are angling for a piece of the action in an investment-starved, sanctions-battered, consumer-savvy country of nearly 80 million people.

The stampede of suitors underscores the latent appetite for a country that has long been off-limits yet boasts some of the world’s largest reserves of oil and natural gas, in addition to a bustling and underserved consumer market.

But the flurry of interest doesn’t mean that the tentative nuclear deal reached last week is opening the floodgates to a wave of fresh foreign investment in Iran. Those most active so far, especially China, have for years dabbled in the Iranian market and have worked around U.S. and Western sanctions, even during the darkest days of the country’s ostracism. Optimism about a quick rapprochement dimmed further Thursday, after Iran’s supreme leader questioned the very underpinnings of last week’s agreement.

And plenty of questions remain regarding when and how sanctions on Iran will be lifted, depending on whether and when Tehran complies with demands to dismantle its stockpiles of nuclear material and open up its nuclear infrastructure to international oversight. The pace of sanctions relief appears to be one of the major points of disagreement ahead of a June 30 deadline to finalize the nuclear deal. The U.S. threat that sanctions can “snap back” if Iran fails to comply is particularly worrisome for Western firms thinking of jumping into the Iranian market.

“All of these companies can have conversations, they can look at potential deals, and that’s fine. It’s only when they cross the line that it becomes a problem for sanctions,” said Richard Nephew, who served as the State Department’s lead sanctions expert on the U.S. negotiating team until December and is now with Columbia University’s Center on Global Energy Policy.

China’s economic blitz with Iran in many ways has been the most comprehensive. Yet that isn’t due to mercenary business interests, but rather because easier access to Iran dovetails with a number of key Chinese strategic initiatives, including securing greater supplies of energy, building a “Silk Road” connecting the Middle East to Central Asia and then China, and increasing Beijing’s geopolitical influence in the region. That’s especially evident in Chinese funding for a $2 billion natural gas pipeline connecting Iran and energy-starved Pakistan, a project that has languished on the drawing board for years in large part due to Western sanctions on Iran.

“China’s doing it to serve its strategic needs,” said Michael Kugelman, a South Asia expert at the Woodrow Wilson International Center for Scholars. “I suspect it sees the pipeline as part of its broader goal of building connectivity and infrastructure throughout the region in order to secure new trade routes and strengthen its economy.” But he cautioned that Beijing has offered to finance the pipeline in the past, as well as other Pakistani energy and infrastructure projects, only to back down later. Other headaches, such as the rebel movement in the Pakistani province of Baluchistan, could also dim the pipeline’s prospects, he said.

Iran’s energy assets continue to entice China, Tehran’s biggest single customer for oil. Shortly after the framework nuclear deal was announced, China said it would purchase more light oil to feed its petrochemical industries. Iran had already been shipping China plentiful supplies of oil even while export sanctions were in place; crude shipments to China rose by one-quarter last year. And Iran’s oil minister visited Beijing this week to talk greater energy cooperation, including bringing back deep-pocketed Chinese energy firms to spruce up tired and underproductive oil and gas fields in Iran.

The preliminary nuclear deal, along with the prospect of relief from most financial and energy sanctions, has certainly made other projects like the gas pipeline easier. This week, China said that Iran would become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB). That’s Beijing’s response to Western dominance of international-development finance institutions, like the World Bank, and is seen in many quarters as a vehicle to push Chinese strategic interests throughout Asia.

While Iran’s inclusion in the AIIB provides a measure of legitimacy to Tehran’s re-entry into global markets and could deepen business ties between Iran and China, Iran is far from the only new entrant to the bank. Israel joined at the same time, following an avalanche of countries such as the United Kingdom, Germany, and South Korea.

“It doesn’t strike me as big a deal as it might seem. Iran is a World Bank member and even received some World Bank financing in the past decade,” Scott Morris, an expert on international financial institutions at the Center for Global Development, said in an email.

But it’s not just China. Turkey, too, has pulled an about-face since the announcement of the preliminary accord and is now courting energy and other business deals with Tehran. Just a few weeks ago, President Erdogan sharply criticized Iranian backing of Syrian President Bashar al-Assad and Iran’s support of proxy groups, accusing Tehran of trying to dominate the region. On Tuesday, Erdogan was in Tehran haggling over possible discounts on exports of natural gas. He also suggested that the two countries stop trading in dollars and euros and switch to their local currencies, which could allow them to more easily skirt sanctions targeting U.S. dollar transactions. Erdogan’s apparent diplomatic whiplash has even observers in Ankara puzzled.

Further afield, some firms are rubbing their hands. Even before the announcement of the framework nuclear deal last week, European companies were laying the groundwork for re-entering Iran. In February, business groups in Britain, France, and Germany joined forces to create the European-Iranian Business Alliance to lobby for better access to the Iranian market. Shell, the big Anglo-Dutch oil firm, said this week it will consider jumping back into the Iranian market once it has opened.

For many European companies, operating in Iran is more a matter of refreshing old ties than starting anew. While American companies have been subject to varying levels of restrictions on doing business with Iran since the country’s 1979 revolution, many European firms continued business as usual until 2010, when the United States tightened sanctions on Iran’s energy and finance sectors.

And vocal interest doesn’t always translate into money changing hands. Since the interim agreement with Iran that was inked in November 2013 — which relaxed some sanctions and raised hopes for a full opening — many foreign firms have flirted with the Iranian market. That interest heightened after Iranian President Hassan Rouhani traveled to Davos, Switzerland, in January 2014 and beckoned investors to come see what Tehran had to offer.

“We will likely see a lot of exploration regarding new business opportunities, but it is unlikely that parties will sign on the dotted line until a nuclear deal is finalized,” said Zachary Goldman, a former U.S. Treasury Department sanctions official who now heads New York University’s Center on Law and Security.

Even then, there are other worries for Western firms: dueling visions over just what last week’s nuclear agreement really means. U.S. and European diplomats say that Iran will only get sanctions relief when it fully complies with all the demands to dismantle and shackle its nuclear program. But Iranian leaders view sanctions relief as an immediate prize simply for implementing the final accord.

Iran’s supreme leader, Ayatollah Ali Khamenei, spoke on Thursday for the first time about the nuclear accord, pouring cold water on hopes for a common understanding. “All sanctions should be removed when the deal is signed. If the sanctions removal depends on other processes, then why did we start the negotiations?” he said, according to Reuters.

There’s some merit in both arguments. The nuclear deal codifies some concessions that Iran already made and carried out as part of the 2013 interim agreement. By that reading, Iran would indeed deserve some immediate sanctions relief. But U.S. reminders, including by President Barack Obama, that sanctions could “snap back” if Iran fails to comply with the terms of the final agreement may well be enough to dampen Western business interest in Iran, especially by U.S. banks and energy companies.

In theory, corporations from Beijing to Brussels stand to make huge sums from the opening of the Iranian market. In practice, though, Iran’s long-awaited return to the world economy depends on a whole lot more than business appetite.

Photo credit: ATTA KENARE/AFP/Getty Images

Keith Johnson is Foreign Policy’s deputy editor for news. @KFJ_FP

 @jtrindle

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