The Iran deal: It’s the economy, stupid
“I had to fill my shoulder bag with Iranian Rial every day to meet routine expenses. The taxi driver would simply demand thousands of Rials to take me to a place hardly 5 to 10 KM away.” This is what my friend had to tell me about Iran’s economic situation after his short visit in 2013-14. As a matter of fact, Iranian Rial hit its all-time low in 2012 due to the crumbling economic situation that arose out of the sanctions imposed on the country. As it stood then, 34,500 rials bought $1 on the open market. Today, almost 30,000 Iranian rials equals just one US dollar.
It is evident that life in Iran today is not much different from what it was in 2012, and the very fact that things were not changing for the better seems to have pushed Iran to finalize the nuclear deal. As it stands, the geoeconomics behind this deal are as important for Iran as geopolitics can be. However, the latter factor appears to have overshadowed the former due to a misplaced focus on Iran’s political ideology, and its conflict with Arab “Sunni States.”
Iran, as the deal shows, is as rational a state as any state can be expected to be. And the nuclear deal is a result of very careful deliberations carried out at the highest levels of its government. The underlying principle of these deliberations was simple: Economic survival. Geopolitics notwithstanding, Iran would never have been able to compete with rival states without getting rid of the western imposed sanctions. The nuclear deal relieves Iran of such pressures.
Although the Joint Comprehensive Plan of Action agreed to in Vienna is a “landmark” agreement which is sending political jolts across the entire Middle East, there’s no denying the fact that Iran has managed to create a situation through diplomacy that it can use to its advantage. In simple words, the deal is more than a new chapter in Iran’s relations with the West and the world at large; it is the agreement by which Iran can transform itself from a potentially powerful, though politically and economically isolated country, into an emerging power.
This potential transformation isn’t limited to a new strategic outlook towards both the western and non-western worlds, it can also be used as a linchpin in creating a new balance of power vis-à-vis its rival regional states, especially Kingdom of Saudi Arabia.
50 oil and gas projects on tap
As a matter of fact, Iran is readying the means of achieving the said objective. On July 23, 2015 Iran outlined plans to rebuild its main industries and reopen trade with previously inaccessible markets. Iranian officials reportedly said that Iran is targeting 50 oil and gas projects worth $185 billion by 2020.
Iran’s Minister of Industry, Mines and Trade Mohammad Reza Nematzadeh said the Islamic Republic would focus on its oil and gas, metals and car industries with an eye to exporting to Europe after sanctions are lifted, rather than simply importing western technology. “We are looking for a two-way trade as well as cooperation in development, design and engineering,” Nematzadeh told a press conference in Vienna. “We are no longer interested in a unidirectional importation of goods and machinery from Europe,” he said.
The rapidity with which Iran is responding to the historic opening created in Vienna reflects its overriding desire to re-integrate with the global economy in order to facilitate its growth as an economic and political power.
On the flip side, two-way trade and investment with Iran is an invitation to western corporate interests to invest in Iran. For the US and its allies, this agreement provides a new opportunity to tap untold billions of dollars in profits by entering a virtually untapped market that runs the gamut from consumer goods to energy investments and financial services.
Iran signs with Euro firms
Iran’s deputy Economy Minister Mohammad Khazaei said Iran has already completed negotiations with some European companies that want to invest in the country. “We are recently witnessing the return of European investors to the country. Some of these negotiations have concluded, and we have approved and granted them the foreign investment licences and protections,” Khazaei said at the press conference. He was further reported to have said, “Even in the past couple of weeks we have approved more than $2 billion of projects in Iran by European companies.”
For the West, the benefits of this deal are clear. Apart from the very obvious benefits of low oil prices, the western corporate world stands to gain a great deal. Iran has a market comprised of tens of millions of highly educated citizens and thousands of small and medium-sized companies seeking deals to grow in the near and long term.
The market for consumer goods in Iran is massive, stemming from the upper-middle income nature of it’s population, and its long-standing taste for western trends. Companies such as Coca-Cola and Starbucks, Apple and Dell will be welcome in a country where more than half the population has Internet access, and where literacy rate among the youth is almost 98%.
Iran’s $100 billion stock market is also a major focus of foreign companies. Given the fact that there’s going to be virtually no limit on foreign investment, investors are already eyeing it as a “gold mine” with free access.
To facilitate this investment, especially in energy sector, Iran has already announced plans to introduce an entirely new contract model. Iran’s deputy oil minister for commerce and international affairs was recently reported to have said that “This (new) model contract addresses some of the deficiencies of the old buyback contract and it further aligns the short- and long-term interests of parties involved.” He said the deals would last 20-25 years — much longer than previously less popular buybacks, which effectively were fee-paying deals with global oil majors such as France’s Total for services they performed on Iranian oil fields.
Apart from facilitating investment in the oil sector, Iran is also clearly looking towards privatization. Through privatization, it’s aiming at establishing joint ventures for auto parts manufacturers with the aim to produce 3 million vehicles by 2025, of which a third would be exported. To facilitate the inflow of foreign capital, Iran has also announced extended co-operation between domestic banks and foreign investors.
From the above details, it is self-evident that Iran’s major concern was and still is its economy. The Iranian nuclear agreement is therefore going to be an economic game-changer. That economic issues were the main concern for Iran is evident from the numerous announcements made after the deal was announced. The post-deal statements, announcements, conferences and meetings have overwhelmingly been “economic” in terms of deals offered, plans announced and strategies outlined. There has hardly been anything strictly “political” or “strategic” apart assurances from Iran regarding full compliance with the deal, and that “concerns” of other states would also be addressed in order to maintain a healthy politico-military situation in the region.
Iran’s economic imperatives notwithstanding, it can also not be denied that for the US the deal was important not so much for transforming Iran’s economy but for transforming the state from an adversary into an “ally.” This strategic imperative is evident once we take into account the dismal military situation the US faces in Afghanistan. Having Iran on its side would certainly help the US in Afghanistan. The benefits include having an alternative supply and exit route and reducing dependence on Pakistan.
In addition, by making Iran an ally in Afghanistan, the US might be able to neutralize Iran’s involvement in other conflicts in the Middle East, especially in Syria. It might also become possible for the US, if the deal gets finalized and approved by Congress, to wean Iran away from joining the newly emerging politico-economic coalitions in Eurasia such as BRICS, SCO, the New Silk Roads, and the Eurasian Economic Union.
Having Iran on Washington’s side would allow the US to use Iran as a hedge against other strategic rivals. Such a tactic would not have come as a surprise to any student of Cold War politics. This was precisely the same approach the US used with many different countries, including Iran itself, as it sought to counter-balance the Soviet Union.
Salman Rafi Sheikh is a freelance journalist and research analyst of international relations and Pakistan affairs. His area of interest is South and West Asian politics, the foreign policies of major powers, and Pakistani politics.
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