As one of the most resource-rich countries in the Middle East, Iran should be a major player in the world economy. But with a regime in charge that despises so much about the West, the country has yet to make its presence felt in the global marketplace. Doing business with Iran is hampered by strict sanctions imposed by both the UN and individual countries, and aimed in the most part at preventing the Iranian regime from continuing its rumoured nuclear enrichment programme.
Antagonistic President Mahmoud Ahmadinejad works hard to keep his country in the world’s news, whether by promising to wipe Israel off the face of the Earth, or by decrying the evil of the ‘Great Satan’ that is the US. However, his fiery talk to his own population is quite different from the coy and muddled responses given to Western journalists, most evident in his recent interview with Piers Morgan on CNN.
Cultural perceptions
Iran, until 1935 was known as Persia, and is one of the oldest and most advanced civilisations in the world’s history, contributing significantly to global understanding of science, astronomy, mathematics and medicine. Author Cyrus Massoudi, whose family fled Iran after the revolution of 1979, recently returned to the country of his roots to discover a rich and varied land unlike anything he had seen portrayed by the western media. His book, Land of the Turquoise Mountains, describes a nation of many contradictions.
He told Business Destinations: “I think there is still a huge amount of mutual misconception between Iran and the West. Too many people in Europe and the US are still reliant on media portrayals of their Iranian counterparts as either flag-burning fanatics or provocatively coiffed youths railing against the status quo.”
Returning exiles
After the revolution of 1979, many wealthy Iranian families either fled, or sent their children to be educated overseas. As such, there are a significant number of Western-educated young Iranians who have returned to the country and become frustrated at the restrictions imposed on them by the oppressive Islamic regime.
Massoudi believes the influence of these young people could be huge, but the frustration they feel is detrimental to the level of expertise needed within Iran’s economy: “While it brings in fresh, foreign ideas and cures many young people of the obsession for a life abroad, it is also a huge contributor to the brain drain that is robbing Iran of many of its brightest and best young minds at a time when it is desperately in need of hanging onto them.”
Iran’s economy has taken a battering in recent years. At a little over $1trn, Iran is currently the 18th largest country in terms of GDP, and the economy grew only two percent in the last year. Many key industries are state owned, and there is an overreliance on oil and gas. The country has the second-largest natural gas reserves in the world, the third-largest oil reserves, and these have propped up the economy over recent years. The opportunities to exploit these resources are vast, but depend largely on the lifting of UN sanctions.
The ongoing issue of Iran’s nuclear ambitions, and whether it is seeking to build a nuclear bomb, has meant the country’s relationship with others has been fraught. The US has led calls for sanctions, with the UN Security Council imposing resolutions preventing international banks doing deals with Iran.
A notable example of this came in August when Standard Chartered was exposed as having traded with the Iranian government for nearly a decade, hiding illegal transactions of more than $250bn. The sanctions have been met by many in the business community with anger, where some are questioning why international firms should be prevented from doing business with Iran. One Standard Chartered executive is rumoured to have said in response to a warning by a US colleague: “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”
The rhetoric from the Iranian regime towards Israel has also heightened speculation that conflict might break out between the two nations. In recent months, many leading Israeli political figures have talked up the possibility of pre-emptive strikes on Iranian nuclear facilities, while also putting pressure on the US government to support them.
International sanctions
The impact of sanctions on Iran’s economy has been huge, and blamed by many for the soaring inflation and high unemployment that grips the country. At the start of October, Iran’s rial fell 25 percent against the US dollar, and has fallen by a total of 80 percent over the last year, while the price of standard goods has soared. Mohsen Rezaei, Secretary of the Expediency Council, told the Financial Times in September that reforms to the economy will be implemented over the next two years. He added: “This is not going to be an austerity economy, nor will it be an underground economy, but an economy that will be within [recognised] economic theories to address conditions under sanctions. If we had not faced sanctions, we would never have thought of [reducing our dependence on] oil. Sanctions are dragging us in that direction.”
Many outside observers believe that as a result of sanctions and economic woes, unrest within the country will be the catalyst for another Middle Eastern revolution. Israel’s Foreign Minister Avigdor Lieberman – although hardly an impartial observer – expects imminent action from Iran’s youth, telling the Israeli paper Haaretz recently: “The opposition demonstrations that took place in Iran in June 2009 will come back in even greater force. In my view, there’s going to be an Iranian-style Tahrir revolution. The young generation are sick of being held hostage and sacrificing their future. The situation in Iran and the feeling of the man on the street is one of economic catastrophe… There’s a shortage of basic goods, a rise in crime, and people are trying to flee the country, sending money abroad.”
Israel’s Finance Minster, Yuval Steinitz, echoed these sentiments, telling reporters in September: “The sanctions on Iran in the past year jumped a level. It is not collapsing, but it is on the verge of collapse. The loss of income from oil there is approaching $45-50bn by the year’s end. The Iranians are in great economic difficulties as a result of the sanctions.”
US Secretary of State Hillary Clinton recently told reporters that if Iran cooperated with the P5+1 group of countries seeking a diplomatic solution to the nuclear issue, then there is a good chance the economically harmful sanctions could be lifted: “Those could be remedied in short order if the Iranian government were willing to work with the P5+1 and the rest of the international community in a sincere manner. Our goal has been, and remains, to persuade the Iranian regime to negotiate seriously in good faith with the international community over its nuclear programme, to fulfil its obligations to the International Atomic Energy Agency and to the UN, and to do so expeditiously.”
Massoudi argues that Iran is likely to soften its stance towards the West in the coming months, mainly for economic reasons: “The rial has plummeted, while inflation is sky-rocketing. Fear and anger are forcing people unable to feed their families onto the streets in protest. Something has got to give, and the only logical solution that will avoid civil war or foreign intervention is for the government to comply with UN demands to open up their nuclear programme for inspection.
“The financial incentives for this to happen are huge, and the new trade deals will result in the economy booming as Western money pours in. The trade-off for the government being heralded as economic saviours of the country is a necessary softening of their recalcitrant stance on the international stage, and a more tolerant approach to the progressive attitudes of Iran’s youth.”
Worldwide trade links
Despite the sanctions imposed by the UN, Iran still actively trades with a number of countries around the world. Relations with these countries are often contentious, causing rifts between global superpowers, but in some ways this can be beneficial. Both China and Russia almost relish collaborating with Iran as it emphasises independence from the US.
Currently, Iran’s ties to Russia are borne out of the situation with the US, as well as a joint suspicion of Turkey’s economic growth. Russia often abstains from voting during UN discussions on sanctions for Iran, while it has also provided the country’s military with aeroplanes. The main source of trade between both is energy, with notable oil and gas partnerships firmly established. Russian firms Gazprom and Lukoil have both been investing heavily in Iranian oil and gas opportunities.
China’s links with Iran are also overwhelmingly based around oil and gas. Last year China imported 10 percent of its oil from Iran, and has also begun investing in the modernisation of the country’s energy infrastructure. Iran has granted the China National Petroleum Corporation (CNPC) a series of lucrative contracts to explore oil and gas opportunities in its territories, including an $85m contract to explore wells in the south of the country, a $3.6bn contract for the development of offshore gas fields and a $2bn contract to exploit the oil fields in the northern region of Ahvaz.
Trade between the two countries was around $45bn in 2011, and will likely reach $50bn this year. Iran’s economy is greatly dependent on its exports to China, 80 percent of which are oil, with the rest made up of minerals and chemical products. Iran has relatively good relations with other countries too.
India and Iran have also strengthened trade links in recent years. In 2007, trade between the two countries jumped 80 percent from the previous year to $13bn as each began trading oil − Iran is currently India’s second-highest oil provider, accounting for 16.5 percent of the Asian giant’s total imports. Indian oil firms in 2009 confirmed that many would actually be investing in Iranian natural gas exploration to the tune of $5bn.
There has been an uncertain relationship between the two countries during the last decade. Attempts to build a gas pipeline from Iran through Pakistan and into India, not quite getting off the ground – partly due to pleas from the US for India to withdraw support for the pipeline, and to pressure Iran to come clean about its nuclear intentions.
Regardless, Indian President Manmohan Singh recently visited Tehran, hoping to spur on trade between the two nations. This drew considerable criticism from the US, but India remains defiant about plans to do business in Iran. India’s former commerce secretary, Rahul Khullar, told reporters recently: “If Europe and the US want to stop exports to Iran, why should [India] follow suit? Why wouldn’t we tap into that opportunity?”
Although sanctions have been imposed on Iran by the EU, it still remains the country’s largest trading partner, and in 2008 exports to Europe reached €14.1bn. However, with France, the UK and Germany leading the way in condemning the country’s nuclear plans, this blockage could prove ultimately fatal to Iran’s economic prospects.
Tehran
The Iranian capital Tehran, has a population of just under 8.5 million. It is the economic powerhouse of the country. as 45 percent of Iran’s industrial firms are based there, as well as 30 percent of the public sector workforce. It has four airports, a bustling manufacturing industry, and its own stock exchange. Chinese companies have also invested heavily in modernising the capital’s infrastructure, with one firm spending $328m on expanding Tehran’s subway system. A total of around $1bn is being pumped into improving the capital by China.
Mashhad
Iran’s second-largest city, eastern-lying Mashhad is a hub of Iranian culture and home to many prominent literary figures. It was a major point along the Silk Road that connected east to west, and is close to the borders of Afghanistan and Turkmenistan. Author Cyrus Massoudi believes Iran’s position on the Silk route greatly influenced its development: “Iran became the great civilisation it was through its people’s ingenuity in integrating and developing the influences that flowed from both east and west along the Silk Road.”
Isfahan
Situated nearly 340km south of Tehran, Isfahan is Iran’s third-largest city with a population of 1.5 million. It was once one of the largest cities in the world, thriving between 1050 and 1722 as the capital of Persia. Littered with stunning Islamic architecture, including the Ali Qapu royal palace, the Jameh Mosque and Naghsh-e Jahan Square. It is also famous as the main producer of the Persian rug. Its main production today is based around steel and textiles, but is also where many of Iran’s experimental nuclear facilities are located.
Tabriz
Located in the north west of the country, Tabriz is steeped in Iranian history and culture. As with many of the major cities, it was once the capital of Persia, and houses many historic sites, including the Tabriz Historic Bazaar Complex, which was named a World Heritage Site in 2010. The city is considered Iran’s second most productive after the capital, with many producers of machinery, vehicles, and chemicals based there. However, the city lies in a region that is particularly prone to earthquakes, necessitating many rebuilds during its history.
Karaj
Established as one of Iran’s academic hubs, Karaj is in the north of the country. The city relies heavily on its location between Tehran and the Caspian Sea, acting as a link for many traders along the route. The city has a number of leading universities, such as the University of Environment, the Karaj Payam Noor University and the Centre for Research in Agriculture and Nuclear Medicine of Karaj. It is also one of the more popular tourist destinations in Iran due to its pleasant climate and location close to the Alborz Mountains.
