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Iran’s Trade Deals: Will the US Miss the Boat?

Patrick Smith

It is hard to find anything Israelis and Iranians agree upon, but they now hold one truth in common: The sanctions imposed on Tehran in mid–2010 over its opaque nuclear program are crumbling. Executives and state-enterprise bureaucrats from Beijing to Bombay to Moscow to the European capitals are poised to deal now that we have an agreement to make Iran’s nuclear plans transparent and define its intent as peaceful.

Here is the question: Are American companies ready to attend the party?

U.S. investors have advantages in their long history of commercial engagement with pre-revolutionary Iran and—believe it or not—the immense good will of most Iranians toward Americans. The smarter American execs will understand this.

Related: Why Iran Is Now Obama’s Best Middle East Bet

But they have handicaps, too. Chief among these are Iran hawks in Congress (both sides of the aisle now) and a foreign policy in need of a radical remake. Either or both could hold back the American economy even as the rest of the world charges into a new Iran. 

At the moment you have an absurd picture.

Commercial delegations from Europe are lining up in Tehran, Russia is reported to be negotiating a deal for half a million barrels of Iranian oil a day, and the Chinese and Indians are poised to tap Iran as a source of energy imports and well-priced industrial goods—the old “appropriate technology” draw.

The potential deal with Russia could result in new sanctions. According to The New York Times “some Democrats accuse Tehran of violating the terms of  the interim deal. The White House said it shared those concerns, noting that Secretary of State John Kerry raised the matter with Russia’s foreign minister, Sergey V. Lavrov last Monday.”

Deal or no deal, a worrisome number of American lawmakers want sanctions and don’t want even a trade alliance with Iran, which they consider a nation of evil-doers.

Related: Iran Nuclear Bill Would Have Consequences

The Iranian economy has been a wasting asset for the past three and a half years. Sanctions have devastated industry, oil production, banking, and trade. The jobless numbers are awful. Here is a statistical sketch:  

• Gross domestic product fell by 1.5 percent last year, according to the International Monetary Fund.

• The (official) rial exchange rate, historically in the range of 7,000 to 8,000 to $1, tumbled to more than 12,000 after sanctions were imposed and was trading at 25,000 to $1 when Hassan Rouhani, the new reformist president, took office last summer.

• Consumer-price inflation last year was roughly 42 percent.  

• The Central Bank of Iran reports unemployment at about 10.5 percent, but youth unemployment (in a very young nation) is 24 percent, according to a recent Financial Times analysis.    

Oil exports are off 40 percent since sanctions were imposed, to 1.5 million barrels a day. Natural gas production—Iran’s reserves are the world’s second largest—is about a fifth the average in the three decades to 2011.   

Related: Iran Has $100 Billion Abroad, Can Draw $4.2 Billion

• The automotive sector, second only to oil and 10 percent of GDP, shrank by 40 percent in 2012, an apparent victim of sanctions plus a drastic reduction in domestic energy subsidies. 

Do not let the tattered appearance fool you. Iran has long had the Middle East’s best diversified and most technologically advanced economy, and the bones are intact. At $550 billion, its economy is more than twice the size of Israel’s, more than five times Syria’s and Iraq’s, and roughly equal to Saudi Arabia’s (and of much better quality).   

Look at it this way. Iran carries consistent surpluses in its current account; it is now about 5 percent. So you have a competitive nation that cannot go shopping. By comparison, Spain is barely out of deficit and Greece, at last report, carries a deficit of nearly 10 percent.

Conclusion: This is not a basket case riddled with structural problems; better to think of it as mothballed—a stilled machine waiting for somebody to update the gears and throw the “on” switch.  

Related: Senate Majority Support Iran Sanctions Bill

Rouhani has had a remarkable six months since taking office. He got the interim deal done on the nuclear program and he is dumping the impractical ideologues who wreaked economic havoc during the presidency of Mahmoud Ahmadinejad.

The numbers so far are modest, and the initial provision for lifting sanctions, which begins to take effect Monday, provide a mere $7 billion in relief. But the future is legible nonetheless:

• GDP will bounce by 3 percentage points this year, the IMF says, reaching 1.5 percent.  

• The currency is inching up, joblessness is inching down.

• Inflation has already dropped to 35 percent and should reach 29 percent this year. 

• The automotive industry will be an immediate beneficiary of the sanctions move because it covers the import of parts. One reason the Europeans are lining up is inscribed in a list of companies that are joint-ventured in Iran: VW, Daimler, BMW, Peugeot, Renault, and so on. (On the Asian side are Toyota, Nissan, Hyundai, Kia, Malaysia’s Proton, and Chery, a Chinese manufacturer.)

Related: IAEA Says Iran Asked for Nuclear Talks Postponement

The Iranians welcome the Yanks. But what are U.S. officials saying as Europe flies parliamentary missions to Tehran and the Russians structure megadeals? “We tell everybody with interest in the Iranian market to be very careful not to break any sanctions, as they will face the consequences,” one Washington bureaucrat told the New York Times the other day.

These guys seem to have no idea how clunky the American position is. 

Iran is not about to leap out of a cage, as the East Asian economies did in the 1980s and 1990s. But we may someday soon be thinking about some kind of Persian tiger. 

Assuming Americans get around to playing the good cards they hold, it will not be the easy hand they held in the shah’s day. Time has not stood still. India, China, certainly Russia, and the rest of the “middle-income” crowd represent alternative markets now. Some of these nations share affinities with Iran that Americans do not, and they will deal quite without reference to geopolitics as Americans conceive of it.

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