Davos Diary: Iran Insists It’s Open for Business. Will It Have Any Customers?
With nuclear sanctions lifted, Tehran wants the world to invest in its economy. It remains to be seen if it will have any takers.
DAVOS, Switzerland — It was a sweet but short victory lap this week at the World Economic Forum for Iranian officials, who quickly set aside celebrations over enacting Tehran’s nuclear deal to press for a new cause: selling the world on investment in the Islamic Republic.
Mohammad Agha Nahavandian, chief of staff to President Hassan Rouhani, predicted Iran’s economy could grow by 8 percent annually with the help of foreign investors who are no longer curbed by some U.S. sanctions that were lifted when the nuclear deal took effect last weekend.
“That’s feasible,” Nahavandian said of Iran’s predicted economic growth. He said foreign companies — in the energy sector, information and communications technology firms, and rail, air, and other transportation businesses — have expressed interest in investing.
“Of course, there are things to be done, and the administration is mindful of the fact that the business environment has to improve a great deal,” Nahavandian said. “And we’ve already started that.”
The 8 percent GDP prediction widened some eyes in Davos. The World Bank projects Iran’s GDP will grow by 5.8 percent this year. And Nariman Behravesh, chief economist at IHS, a consultancy that advises clients on current events around the world, gave a far more featured prediction:
“Iran’s economy will benefit from the lifting of sanctions — it can probably grow around 4 percent by next year,” he said.
For the energy sector in particular, Iran’s reopening could be hugely important. That’s because the country has world-class reserves of oil and natural gas but has been starved of foreign investment for years. Europe, especially, has visions of one day tapping Iran’s abundant gas fields.
With the lifting of sanctions, Iran’s energy sector is again open for international business — in theory, at least. In reality, the nuclear deal didn’t lift all sanctions on doing business in Iran. And unwinding years of restrictions on Iran’s banking and financial sector is creating headaches for banks, companies, and lawyers around the world.
U.S. firms, in particular, face a delicate dance to do business in Iran and still be in compliance with U.S. rules. It will likely take months until international businesses feel confident they can work in Iran without running afoul of the sanctions that are still in place, such as those prohibiting dealings with Iranian businesses owned by the Islamic Revolutionary Guard Corps. U.S. businesses face hefty fines if they cross the line.
Nahavandian said the absence of American companies means European firms have the opportunity to get into Iran’s energy market first. They also can help Iran build the infrastructure needed to help Tehran’s economy grow.
So far, European firms are flirting with Tehran, but few deals of any significance have been sealed. Former German Chancellor Gerhard Schröder recently traveled to Tehran to discuss business opportunities with government leaders, including Iranian Foreign Minister Mohammad Javad Zarif, and Czech officials have discussed cooperating with Iran in the electricity sector.
This is where the U.S. sanctions that remain in place loom large. Potential business between European companies and Iran could put the former on the wrong side of U.S. regulators. That’s a risk because the potential to profit from doing business in the United States is much greater than in Iran.
But once the tangles of sanctions are cleared up, Iran’s energy sector is likely to attract plenty of interest from European, Asian, and American firms — even though the world right now is drowning in cheap oil and gas, and doesn’t need to scramble to find new supplies. In fact, low oil prices make Iran an even more attractive place to invest. It costs very little to pump oil in Iran, unlike complicated and expensive wells elsewhere, whether in the U.S. shale patch or huge deepwater rigs.
“Huge oil and gas resources with very low production costs and low geological complexity are very attractive for investors, particularly at the current time of low oil prices,” Sara Vakhshouri, formerly of the Iranian national oil company and now head of energy consultancy SVB Energy International, told Foreign Policy.
The trick for Iran, as it has been since the 1979 Islamic revolution, is to offer attractive terms to international investors. In years past, Iran’s government offered foreign companies unattractive contracts in which oil companies invested to boost production in Iranian fields, then ceded control of the project to Tehran in exchange for a flat fee. Now, recognizing the need to compete for capital, Tehran is overhauling the contract terms it offers major oil and gas companies to make them more closely resemble investment conditions in other oil states.
The new contracts, Vakhshouri said, are “much more flexible and attractive” than the old terms, but by themselves would not likely be enough to entice Big Oil away from easier projects elsewhere. In that sense, she said, low oil prices and low production costs are “Iran’s lucky charm to attract international investors.”
Even if it does manage to attract investors, IHS’s Behravesh says Iran’s arrival on the world energy market will only serve to depress low oil prices lower.
“Expected oil exports from Iran have already depressed oil prices,” he said. “But unless Iranian production can ramp up quickly, further downward pressure from Iranian oil will be limited.”
For now, the world’s attention has focused on Iran’s plans to ramp up oil production and fight to regain the market share it lost while sidelined due to sanctions. Longer term, though, Iran’s re-emergence will be about a lot more than just oil: The country has big plans to tap its massive natural gas reserves and become a major exporter.
Europe, still struggling to find alternative sources of energy other than fickle Russia, is already eyeing future imports of Iranian gas. And growing economies in Asia, like India, are also looking to Iran’s abundant reserves, whether in raw form or transformed into valuable products like petrochemicals.
For the gas game, Vakhshouri said, Iran’s “massive gas reserves and unique geographical position” could one day make it a key player for markets both West and East.
David Francis reported from Davos, Switzerland. Keith Johnson reported from Washington.
Photo credit: Remy Steinegger/swiss-image.ch
David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis