“Iran will have to fall back on second-best solutions as Western companies leave”
Frud Bezhan writes for Radio Free Europe/Radio Liberty, with a contribution from EA:
Facing renewed economic sanctions from the United States and the possible knock-on collapse of its business dealings with Europe, Iran is looking to Russia and China to expand trade. And Moscow and Beijing, embroiled in their own economic disputes with Washington, are well-positioned to oblige.
US President Donald Trump’s decision to quit the Iran nuclear deal and reimpose economic sanctions on Tehran bars US firms from dealing with the Islamic republic and promises penalties against European companies that choose to continue to do business in Iran past a 90- to 180-day “wind down” period.
But economists say that Moscow and Beijing are less exposed both to sanctions tied to Iran’s contentious nuclear program and others linked to the country’s human rights record, alleged support for terrorism, and ballistic-missile program.
The departure of Western competition in a lucrative export market could essentially be viewed as a gift by Iran supporters Russia and China, UN Security Council members that helped negotiate the nuclear deal under which Tehran agreed to curtail nuclear activities in exchange for UN and U.S. sanctions relief.
“There’s a tilt towards the East because Iran doesn’t have options in the West,” says Steve Hanke, an economist at Johns Hopkins University in Baltimore. “Everyone in the West is panicked over the cloud of sanctions, so that’s why the Europeans are going to have to go to the sidelines. If they do, the Iranians will fill the void with Russia and China.”
The renewed U.S. sanctions will target Iran’s automobile, civil aviation, banking, shipping, ship-building, and energy sectors, among others. U.S. citizens and companies will be forbidden from doing most forms of business with Tehran, but foreign individuals and companies will also be affected. Aside from the promise of stiff penalties, those seeking to do business with Iran will not be allowed to use U.S. banks; deal in the global reserve currency, the US dollar; or access powerful U.S. stock exchanges.
Prior to the Iran nuclear deal, when Iran was disconnected from SWIFT, the US-dominated global-transaction network, China and Russia found end arounds. Instead of the dollar, business with Iran was conducted in euros, the Chinese yuan, or in barter deals. European firms that have operations in the United States, use American banks, and are connected to the US financial system, don’t have such options.
Representatives of the European Union, scrambling to find a way to protect its business interests following Trump’s deal withdrawal, met on May 16 to discuss ways of maintaining the nuclear agreement with the remaining signatories (EU, Germany, France, Britain, Russia, and China) and of shielding European business deals with Tehran.
In the meantime, many European firms are expected to withdraw from their deals with Iran in the face of the US wind-down period before sanctions lifted by Washington under the nuclear agreement are reinstated.
In what would be the first significant fallout from Trump’s decision to quit the nuclear deal and a major blow to Iran’s efforts to boost foreign investment, economists expect the French oil giant Total to walk away from its majority stake in the $5 billion, 20-year project to develop the South Pars field, estimated to hold one of the world’s largest natural-gas reserves.
Iran’s Oil Minister Bijan Namdar Zanganeh was quoted by the Iranian media on May 17 as saying that China’s state-owned CNPC, a minority shareholder in the project, was ready to replace Total if the French energy giant pulled out.
Total has suggested it will go forward with the South Pars project only if it wins an exemption from Washington on the sanctions.
In another significant move to shield Iran from US sanctions, the Russia-led Eurasian Economic Union trade bloc signed an interim trade deal with Iran that lowers tariffs on hundreds of goods. The bloc, which includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan, also plans to begin three years of talks with Iran that aim to create a free-trade zone.
Even before the 2015 nuclear deal — which was sold in Iran as a way to end the country’s international isolation, stimulate the economy and spur investment, and bring other tangible results such as new aircraft to modernize the country’s ailing domestic fleet — Tehran had moved closer to Russia and China.
During the sanctions regime, the Iranian government and companies were suspected of circumventing UN, US, and EU sanctions by using Asian banks, shipping reflagged oil to Asia, and exchanging oil for goods.
Economists predict that Trump’s action will push Iran closer to Russia and China, which have already laid the groundwork for business.
“China is currently financing multi-billion-dollar power and infrastructure projects in Iran, while Russia desires to export manufactured goods,” says Justin Dargin, a Middle East energy expert at Oxford University. “With the probable withdrawal of U.S. and European companies, Chinese and Russian companies stand to benefit.”
Bilateral trade between Moscow and Tehran declined in the past decade, in part because of UN sanctions imposed from 2006 to 2012. At its peak in the early 2000s, trade had reached approximately $3 billion, but fell to $1.7 billion in 2017. With or without the renewed U.S. sanctions, economists were predicting that number to rise.
Economists say Russia is eyeing Iran’s energy sector and wants to sell steel, transport infrastructure, and other manufactured goods to Tehran.
On a visit to the Iranian capital on May 10, Russian acting Deputy Foreign Minister Sergei Ryabkov said the two countries intended to continue “all round economic cooperation.”
“We are not scared of sanctions,” Ryabkov said.
Russian oil firms, hit by sanctions from the West following Moscow’s aggression in Ukraine, have sought to garner business from Iran. In March, Tehran signed a $742 million deal with Russian state-owned energy firm Zarubezhneft to boost production at two oil fields in the country’s west.
Oil for Goods
In November, Russia implemented an oil-for-goods program with cash-strapped Iran, with Moscow buying Iranian oil in exchange for Russian goods, including oil pumps and pipes, gas drilling equipment, metal and wood products, leather, and wheat. The two countries have been working on oil-for-goods deals worth up to $20 billion. Oil is priced and traded in U.S. dollars, which Iran would have limited access to under the renewed sanctions.
In the agriculture sector, Iran is becoming one of the largest exporters of fruit to Russia — which in 2014 countered EU and American sanctions over Russia’s interference in Ukraine and annexation of Ukraine’s Crimean Peninsula with a ban on food imports from the U.S., EU, and other Western states — while Iran is increasingly importing Russian grain.
Economists say it is China, however, that stands to be the biggest winner of U.S. sanctions on Iran.
Beijing and Tehran agreed in 2016 to expand trade to $600 billion over the next decade. Trade between the countries was valued at around $50 billion in 2017.
China is the third-largest source of imports by Iran and its largest export market. In terms of oil, Iran’s most valuable export, China is the largest importer.
Iran is also part of China’s plan to revive the ancient Silk Road trade route, known in China as One Belt, One Road.
Last week, Beijing launched a freight rail connection to Iran, in what observers said was a message that the two countries would continue to expand trade.
Dargin of the University of Oxford predicts that Iran will turn to China for economic investment and turn to the Chinese currency. The yuan is already funding some Iranian projects, he said, and the withdrawal of European companies will allow Chinese companies that have little or no contact with the U.S. market to acquire that market share.
“The more that Iran is isolated by the West, and the more it forges relations with Russia and China, then further down the road, Iran will be less vulnerable to Western economic and diplomatic pressure in the future,” says Dargin.
The establishment of an Iran-Russia-China trade bloc is not a given, however.
“China is not wholeheartedly going to support Iran if it jeopardizes its own interests,” says Scott Lucas, an Iran specialist at Birmingham University in Britain and editor of the EA WorldView website. “The Russians face their own economic pressures and so they are going to be limited in terms of what they can do.”
West’s Loss, Iran’s Loss?
After the 2015 nuclear deal, there was a rush of European business delegations as Iran opened up the country’s vast oil and gas reserves to European companies in the hope of cashing in on improved relations with the West.
Besides Total, energy giant Royal Dutch Shell has signed a lucrative deal with Tehran and Franco-German aircraft manufacturer Airbus has agreed to deliver 100 passenger jets to Iran, in a deal worth more than $2 billion. French automaker PSA Peugeot Citroen signed a $350 million deal with Iranian automaker SAIPA to produce 200,000 vehicles annually in Iran. France’s Renault signed a joint venture deal in 2017 under which it would build an engineering and purchasing center to support local suppliers as well as a plant with an initial production capacity of 150,000 vehicles a year. Germany’s Volkswagen said in July 2017 it would start exporting vehicles to Iran, returning to the market after more than 17 years.
Now, European and American companies stand to lose a major new export market and billions of dollars in commercial deals if they end their dealings with Iran in the face of U.S. sanctions.
“Even if European governments adhere to the deal, the largest European companies would still be extremely reluctant to deal with Iran,” says Dargin.
Some European firms appear to have decided that the U.S. market is worth much more to them than Iran. Danish shipping giant Maersk Tankers said on May 17 that it would end its activities in Iran, while German insurer Allianz also announced it plans to wind down its business deals there.
Economists say that, even if Russian or Chinese companies fill the void left by Western firms, they do not have the same level of technological expertise as companies in Europe and America.
“Iran will lose in the short-term,” says Hanke. “Iran will have to fall back on second-best solutions as Western companies leave.”