Nuclear deal signed, Iranians await economic rewards (+video)

The sanctions relief provided in the nuclear deal reached in Geneva looks good to Iranian businessmen, but ordinary Iranians are wary.

By , Correspondent

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    Iranian President Hassan Rouhani (c.) prepares to deliver a keynote address ahead of the ECO council of ministers in Tehran, Iran, on Tuesday, Nov. 26.
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When Iran’s foreign minister returned to Tehran this week on the heels of a widely hailed nuclear agreement cosigned by its longtime nemesis, a deep sense of relief permeated the Iranian business community. 

Although the six-month accord, which limits Iran’s uranium enrichment in exchange for minor sanctions relief, isn’t expected to have an immediately tangible effect on Iran’s struggling economy, the business sector has adopted a pragmatic and positive long-term view. 

Even though the harshest sanctions against Iran, the ones targeting the country’s oil exports and banking sector, will remain in place, analysts say the Geneva agreement has engendered a sense of cautious optimism that will promote domestic investments beyond typical havens such as US dollars, the Tehran Stock Exchange, or gold. 

Recommended: How much do you know about Iran? Take our quiz to find out.

As part of the accord, Iran will receive $4.2 billion in foreign exchange, paid in installments over a six-month period. It is still unclear if this money will come from oil sales made by Tehran during the next six months, or be transferred from the $100 billion in foreign exchange holdings that Iran has been unable to repatriate from overseas accounts due to US sanctions that have blocked it from the global financial system.

Local economists and a government adviser, speaking on condition of anonymity by phone from Tehran, say they’re confident the Iranian government will fulfill its end of the nuclear bargain with the so-called P5+1 powers -- the United States, Britain, France, China, Russia, and Germany. With a final nuclear deal, they foresee the easing and ultimate removal of economic sanctions, and with that, they predict considerable growth. 

“The government is conveying the message: ‘We are reversing the sanctions trend.’ The injection of cash, even if it’s not a significant amount, will boost confidence,” says a veteran Tehran-based analyst. “The potential for sanctions relief means the business community will be willing to make medium to long-term investments they previously weren’t willing to make.”

Preparing for an energy boom

The area most ripe for investment is the energy sector. 

“American conglomerates (not limited to energy companies), whose operations inside Iran were largely voided after the country’s 1979 revolution, will look to reestablish representation inside Iran” if a final nuclear agreement is reached, says Hossein Askari, an economist at George Washington University who has closely studied Iran’s economy. 

 “The government is looking to line up potential investees -- and the largest investments will be in the energy sector, which will require around $200 billion over the next five years in order to ramp up oil and gas production,” Mr. Askari says.

The veteran Tehran-based analyst says some European firms have already sent delegations to Tehran to discuss potential energy and investment opportunities in order to establish a more concrete presence inside Iran in preparation for a potential dismantling of sanctions.

Currently, foreign companies purchasing Iran’s oil are penalized by Washington unless they receive waivers in exchange for reducing their volume of Iranian oil purchases.

Iran’s main customers are currently refineries in China, South Korea, Taiwan, India, Turkey, and Japan, according to interviews with National Iranian Oil Company officials. Washington extended waivers for these countries in February. 

According to the terms of this week’s Geneva agreement, buyers of Iranian oil won’t need to cut their purchases for the next six months to avoid penalty. Sanctions on Iran’s petrochemical sales, the country’s auto industry, and the aviation sector will also be relaxed; European Union and US sanctions on insurance for tankers transporting Iranian oil will be suspended during this period. 

US legislation intended to stop Iran from receiving precious metals such as gold as payment for its oil will also be relaxed for the next six months, but it is still unclear whether the prohibition on receiving gold as payment for oil is expected to remain in place.

Changing tack

Inside Iran, where this week’s nuclear accord has been vastly popular, improved relations with the US have long been considered the gold trophy of domestic politics. Key to maintaining public enthusiasm for a more substantive nuclear deal will be the administration’s ability to implement comprehensive economic reforms that deliver some relief for ordinary Iranians.

“People in the business community are seeing the long-term implications of the deal.  But the man or woman on the street needs to see some sort of difference on the ground,” says Ali Dadpay, an Iranian economist at Clayton State University who travels regularly to Iran. “The lower-income strata is looking at this short term. If they see this deal as something only the rich can benefit from, it will be harder later for the administration to sell them the idea of a deal where Iran makes harder compromises,” Mr. Dadpay says.

Former President Mahmoud Ahmadinejad was widely criticized by critics within reformist circles and many of Iran's traditional old-guard conservatives during his two terms as president for spending hundreds of billions of dollars on subsidized loans (often to business associates), infrastructure and housing projects, and cash handouts to lower-income and working-class Iranians.

These policies were blamed for boosting inflation and diminishing Iran’s currency reserves during a time of global economic crisis. Nevertheless, Mr. Ahmadinejad’s largess earned him considerable support, both among many ordinary voters and among members of the current Iranian parliament whose constituents benefited from the former president’s policies.  

Inflation has started to decline since Hassan Rouhani was elected president in June, and is expected to fall incrementally during the next six months, says Dadpay, the Clayton State University economist. 

On the Iranian street, the most meaningful part of the Geneva agreement is its stipulation “to establish a financial channel to facilitate humanitarian trade for Iran’s domestic needs.”

fact sheet released by the White House after concluding the Geneva accord said the deal “will establish this channel,” but it remains unclear how and according to what timetable it will be implemented. 

Blocked essentials

This is especially important for ordinary Iranians because, to date, US Treasury sanctions have prompted many international banks to prohibit money transfers to or on behalf of Iranian banks or companies for fear that those transactions -- even for the purchase of "permissible" goods such as foodmedicine, and basic medical equipment -- could result in punishment.

Though such payments are allowed under US legislation, the difficulties in actually making payments have led to shortages in some pharmaceutical products and medical devices inside Iran when there has not been enough foreign exchange available in the accounts used to pay for the goods, and in a currency that pharmaceutical companies want, according to American specialists with knowledge of the payment mechanism. 

Right now, expectations are low that a direct channel between a specific Iranian bank and a US financial institution will actually be established within the next six months to pay for Iran’s humanitarian transactions.

“All signs point to the idea that there’s not going to be a direct ‘humanitarian’ channel,” says Samuel Cutler, a policy adviser at Ferrari & Associates, a Washington, D.C.-based law firm specializing in US economic sanctions matters. “Instead, US Treasury officials may decide to meet with and encourage commercial banks currently hesitating to allow transactions to facilitate them for humanitarian goods and services. They may also issue additional legal guidance relating to humanitarian transactions in the near future.”

If this happens, the banks that the US Treasury will try to work with will likely be in one or more of the countries in which Iran has large amounts of money stuck in local accounts.

“The account to pay for it will be scrutinized [by the US Treasury], but Iran can buy food, medicine, and other humanitarian stuff, which will help combat inflation because the government can, for instance, buy foodstuffs and sell it at lower prices,” says the veteran Tehran-based analyst.

At present, $5.56 billion in Iranian oil revenues is stuck in South Korean banks, $5.3 billion in Indian banks and more than $5 billion in Japanese banks as well, reports Reuters.   

Turkey’s Halkbank, which has handled payments for Iran in the past, could also be an option.

“If they take the whole six months to do it, the average Iranian will see little humanitarian benefit to this deal,” Dadpay says. “The Rouhani government needs to show some sort of muscle in terms of economic improvement to prove to the Iranian people -- and to his hard-liner critics -- that the nuclear compromises they make are economically worth the sacrifice.”

In the next round of negotiations between Iran and the P5+1, Tehran will have to make more severe compromises over its nuclear energy program in exchange for significant financial and banking sanctions relief. 

So far, Iran’s supreme leader, Ayatollah Ali Khamenei, who traditionally maintains a quiet, albeit fundamental role behind the scenes of Iran's foreign policies, has revealed his open support for current nuclear talks, conveying the message that Mr. Rouhani’s administration and Iran's nuclear negotiators have his approval. 

There are nevertheless hard-liners who are openly skeptical of the talks and predict failure for his administration’s more moderate approach. Mr. Khamenei may not prevent them from acting on or voicing their discontent

“There are a lot of interests that have to be confronted within Iran to turn the economy around,” says Askari, the economist at George Washington University.

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