Friday, 17 July 2015

Iran Sanctions Lifted: What Does This Mean for the Rest of the World?


So a deal was agreed earlier this week, agreed between Iran and the P5+1 nations, and one of the headlines of the deal is the plan to lift economic sanctions off Iran over the next few years. To learn more about what these sanctions are and the effect they have had you can read our recent article here, but today we're going to look at the future for not just the Iranian economy, but the global economy as this Middle Eastern superpower re-enters many world markets it has been exiled from.

The global energy energy markets are most likely to be shaken up by Iran's re-emergence. In the face of sanctions, Iran has remained in the top 5 of the world's largest oil exporters, thanks largely to deals with China and India. However, sanctions did restrict access to large portions of Iran's original customer base. For example, the EU in 2011 were buying one fifth of all Iranian exports- meaning that the EU outlawing of any Iranian oil importations that followed proved to hit the country's oil revenues hard. Iranian production also fell due to the reduction in demand, from 4 million barrels of oil a day in 2008 to 2.8m in May 2015.

The deal just agreed, however, will remove such sanctions, meaning that Iran will re-emerge and try to claw back those losses of the past decade. Iran currently has over 30 million barrels of oil in offshore reserves that the removal of sanctions will enable it to soon sell. This flooding of global markets with Iranian oil is highly likely to lead to falling oil prices (the effects of which you can read about here).

However, analysts warn that this initial sale of current stocks will not provide a sustainable, consistent flow of revenue for the near future. "It might take years for Iran to get production in its crippled oil fields back to pre-sanctions levels," says Brad Plumer of Vox. "The country does possess vast crude reserves- but that doesn't mean it's all coming online tomorrow".

Nevertheless, due to the increase in supply of oil in the global market it will provoke, this deal will push down global oil prices. This means lower inflation is likely, as transport becomes cheaper and impacts the prices of goods ranging from food to furniture. Of course, this is a scenario in which there are no major global catastrophes in the coming years (fingers crossed).

It's not just oil that will re-enter many markets of the world from Iran, though. For years we have been deprived of many of the nation's finest exports- their rugs, caviar and pistachios to name but a few.

Iranian rugs are the most sought after in the world.
A lack of supply has led to US nut prices rising by over 40% since 2010, so Iran's re-entry into the nut market, like that of the oil market, is likely to reduce prices, providing relief to consumers but quite the opposite to Iran's nut competitors. Only America is competing with Iran at the top of the pistachio sector, and American farmers, particularly those already suffering in drought-stricken California, are likely to receive lower incomes due to the price rise.

However, businesses in America can seek to profit from the return of Persian rug imports. They have been blocked from purchasing the valuable Persian rugs since 2010, and consequently many have had to rely upon the far less lucrative second hand trade. Being able to import Persian rugs again would not only provide extra business opportunities, but it would also update the current rug market that is a couple of years behind. "I'm excited about the variety of quality and the character of carpets that will come out of there that we haven't seen for a long time," says Arash Yaraghi, CEO of NYC-based rugs and furniture outlet Safavieh.

Peugeot has historically seen great success in Iran, though
its operations were knocked back by the sanctions of the
past decade.
Not only will the lifting of sanctions bring new opportunities for Western businesses to import from Iran, but it will also grant access to a whole new market of potential consumers. Carmaker Peugeot, which has historically been a successful brand in Iran, has sought to return quickly to the Iranian market. Jean Christophe Quémard, VP of Middle Eastern and African Operations for the company, has affirmed that not only do Peugeot seek to sell cars in Iran, but also that he believes in the potential to produce in Iran, and in the long term even export. "We are ready to invest. We can provide cash and technology to build modern cars in Iran for the local market", he told the Financial Times.

Analysts are pretty much in consensus over the fact that Iran will not recover fully from the sanctions overnight- however, over the next decade or two we can certainly expect Iran to become an even greater economic power on both the Middle Eastern and global stages. Iran has arguably performed relatively well in the past decade when the barrage of sanctions forced upon it are taken into account: now it is unshackled, perhaps Alan Kohler of the Business Spectator is right: "The world just got another emerging economy".

Mohammad Lone Editor