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Middle East Economy
Easing of sanctions set to boost Iran
From the Financial Times of Sun, 19 Jan 2014 17:36:05 GMT
Iranian woman walks past a mural with a gun made out of an interpretation of the US flag

For Mohammad-Reza Behzadian, Iran’s beleaguered economy is best described in shades of grey.

Iran’s economy, which was light grey in terms of transparency, has become dark grey due to sanctions. We hope and pray that sanctions will be lifted totally to help prevent the deepening of black holes which hurt Iran’s and the world’s economy,” the former head of Tehran Chamber of Commerce said.

From Monday, Mr Behzadian should start to see a slight paling of that dark grey as the easing of sanctions on Iran. He said the nuclear deal agreed with world powers had raised hopes that a new chapter may open in trade ties.

According to the terms of the interim deal agreed in November with the so-called P5+1 – the five permanent members of the UN Security Council, US, UK, France, Russia, China and Germany – the centrist government of Hassan Rouhani will restrict its nuclear programme over the next six months in return for a partial lifting of economic sanctions.

Within this period, some $4.2bn of blocked funds – estimated by Iran’s parliament to total about $60bn in mostly oil revenues – will be released in regular instalments, while sanctions will be suspended on gold and precious metals trading, on the petrochemical and auto sectors and eased on the purchase of aeroplane parts, and medical and health-related initiatives.

Mr Behzadian said Iran’s private sector was the first to suffer from sanctions and would be the last to benefit from restrictions being lifted.

However, Iranian analysts say although the relief is modest – as the most hard-hitting sanctions on crude oil exports and banking remain in place – its impact on the Iranian economy and on sentiment should not be underestimated. Inflation runs at 39.3 per cent and the economy shrank 5.8 per cent last year. Youth unemployment is at about 24 per cent.

Amir Cyrus Razzaghi, head of Ara Enterprise, a private consulting group, said easing the sanctions could add $15bn to the economy this year. This includes about $3bn in automotive, aircraft parts, medicine and medical equipment and $4-$5bn in extra petrochemical exports. He added that about $7bn would be saved from oil exports that would have been blocked if sanctions had been in place.

The petrochemicals sector is expected to benefit immediately from the lifting of sanctions as it is ready to boost production and increase exports. Iran produced $15bn in petrochemicals, most of which were exported, two years ago but that dropped to $10bn due to sanctions.

Iranian officials also expect the aviation sector to benefit fairly quickly. The country’s ageing fleet of 243 aeroplanes includes Boeings bought more than three decades ago. About 100 are grounded because of a shortage of spare parts. At least 70 people were killed in January 2011, when an Iranian Boeing 727 passenger plane crashed. The crash was blamed on bad weather. Iranian authorities usually deny technical problems have been caused by the shortage of parts to avoid causing panic.

But Alireza Jahangirian, deputy transport minister, said he expected the number of flights to increase within two months following the purchase of new parts.

Iran’s automakers, the country’s biggest non-oil sector, are among those that may need to wait longer to benefit, though the industry’s troubles are not only due to sanctions. Manufacturers such as Iran Khodro and Saipa are hugely indebted, with analysts estimating the industry as a whole may need a bailout of at least $2bn.

Vehicle production plummeted almost 50 per cent over the past two years, from 1.6m cars in 2011, mainly because of a policy pursued by Mahmoud Ahmadi-Nejad, the former populist president, that prevented companies from raising car prices despite high inflation.

Automakers accumulated huge debts as a result and were unable to pay parts-makers forcing many into bankruptcy. Sanctions, analysts believe, accelerated the sector’s decline but the market has potential. There are 14m cars on Iran’s road, half of which are beyond repair.

Analysts hope the lifting of sanctions will help re-energise the market encouraging western carmakers notably French producers such as Peugeot back to reclaim their previously dominant position.

But the White House’s efforts at diplomacy and a sustainable nuclear deal are threatened by congressional rebellion, with a significant number of lobbyists demanding the dismantling of nuclear facilities and new sanctions.

“I cannot be too optimistic when I see the extent of money Saudis spend and the number of people Israelis send to influence the US Congress and Senate to block the deal,” a senior banker said. “It is a 50-50 situation.”

The broader banking sanctions still in place are creating some ambiguities. The senior banker said Iranian authorities told businessmen that seven European banks including Commerzbank and Société Générale had been designated to transfer the $4.2bn in blocked funds but “some kind of dilemma” remained over which Iranian banks could receive the money as most are affected by the broader banking sanctions still in place.



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