Five reasons why Iran is the next China
9 min read
24 November 2015
Every country in the world is going to want to trade with Iran. There’s opportunities for everyone – whether you work in electronics or energy.
I am a 80-year-old business man who makes a living by exporting to emerging markets. I recently attended the 2015 Tehran International Industry Exhibition, and I believe that Iran could be a world power in as little as six months.
There are already plans to expand Tehran’s metro, and to electrify the 500-mile Tehran-Mashhad railway. And because Tehran already has an expansive infrastructure system, including a huge four lane motorway, we should have no difficulty in supplying the heavy equipment necessary to make such improvements.
And that’s the thing with Iran – the opportunity and the potential has always been there. The only thing that’s been holding us back have been the sanctions.
Since 1979, Iran has been subjected to a number of severe economic sanctions designed to pressure the country into abandoning its uranium enrichment program.
But on 14 July 2015, Iran met with a group of six world powers – China, France, Russia, Germany, the US, and the UK, collectively known as P5+1. A comprehensive agreement has finally been reached regarding Iran’s nuclear programme, concluding over a decade of negotiations.
Once Iran instigates a number of restrictions on their uranium enrichment program, the economic sanctions that have held the country back since 1979 will finally be lifted.
As a result, many economists view Iran as a coiled spring. They believe that as soon as the sanctions are lifted, Iran could become a major world power in a matter of months.
I feel confident in describing Iran as “the next China” – that is, the next global superpower. Here are my reasons why:
(1) Iran has always had potential
In 2005, Goldman Sachs identified Iran as one of the “Next Eleven” – a group of countries that they believe have high development potential. To be included, a country needs to demonstrate high macroeconomic stability, political maturity, openness of trade and investment policies, and a high quality of education.
Iran was chosen in recognition of its upper-middle-income economy, its high human development, its status as an Islamic republic, and its status as a founding member of ECO, OPEC, and GECF.
With 10 per cent of the world’s proven oil reserves and 15 per cent of its gas reserves, Iran is classed as an energy superpower. Its oil-based economy is worth around $400bn, and because the country was relatively isolated from the global financial markets, Iran was able to avoid recession in the aftermath of the 2008 global financial crisis.
However, the economic sanctions have had a punishing effect on Iran’s economy, resulting in mass inflation, mass unemployment, and an unfortunate “brain drain”, with many of Iran’s brightest minds emigrating to less restrictive markets.
Iran has significant economic potential that has so far been kept in check by sanctions. So once these sanctions are lifted, Iran can immediately begin to engage economically with the world once more.
(2) The mass unfreezing of global assets
When the sanctions were first imposed, up to $100bn of Iran’s money became frozen in foreign banks. In 2013, for example only $30-50bn of Iran’s foreign exchange reserves were readily accessible.
But as part of the sanction relief scheme, Iran’s frozen funds will be released, freeing between $29-100bn. Crucially, though, it’s specified that these unfrozen funds are to be used to finance Iran’s domestic investments. To encourage a steady and sustainable financial recovery, they’ll be kept abroad until required.
Oil – and the price of oil – will, of course, play a role. What effect will the lifting of sanctions have on the world markets? And how will Iran rise to the challenge of becoming a global trading partner? Continue reading on page two to discover why Iran is a goldmine for foreign investors.
(3) The price of oil
Here’s one area on which the economists cannot yet seem to reach an agreement. Once the sanctions are lifted and Iran is free to export oil once more, will the price of oil rise or fall?
Some US economists believe that Iran could reduce the world price of crude petroleum by 10 per cent, which would save the US up to $76bn a year. This in addition to the economic boon that would spring from competitive US multinational firms operating in the Iranian manufacturing and service sectors.
However, it’s also been proposed that a powerful Iran could serve to double the price of oil, which would cause the US GDP to fall by up to 2.5 per cent, plunging the country into recession.
It must be remembered that these predictions are based on the notion that Iran might have nuclear weapons. Given that this is expressly forbidden by the terms of the agreement reached with P5+1, such alarmist thinking might now be taken with a pinch of salt – if not dismissed outright.
Yet in any case, whether the price of oil rises or falls once the sanctions are lifted, all seem to agree that things will look very good indeed for Iran. The World Bank believes that Iran’s strong position in the world oil market could cause their economic growth to surge to 5 per cent in 2016.
(4) Fairer trade
The lifting of the sanctions will make it considerably easier and more profitable for Iran to trade internationally – whether it’s oil or other products.
The World Bank estimates that exports from Iran will eventually increase to approximately $17bn, about 3.5 per cent of its GDP.
The countries most likely to see a large rise in post-sanctions trade with Iran include China, India, Turkey, Saudi Arabia, and the UK.
(5) A new goldmine for foreign investors
The sanction relief scheme will allow foreign firms to invest once more in Iran’s many lucrative sectors, including oil, gas, automobile, electronic, infrastructure, and others.
As a result, European companies are already taking decisive steps to enter the Iranian market. Investors have apparently already fully booked all of Tehran’s hotel rooms for the remainder of 2015 and throughout 2016, and the capital city has already played host to a number of international investment conferences.
Andreas Schweitzer from Arjan Capital even went so far as to describe the lifting of the sanctions as Iran’s “Berlin Wall moment.”
“There’s more Iranian projects than international money to invest,” he says. “Iran now has the characteristics of East Germany in 1989.”
British Foreign Secretary Philip Hammond said he expects Iran’s sanctions to be lifted by spring 2016. So by this time next year, Iran may already have established itself as a new global superpower.
Peter Westerman is managing director at Westermans International.