The key to unlocking Iran's economic potential

What do the luxury hotels Traders Hotel Yangon in Myanmar and the Espinas in Tehran, Iran have in common?

Both are packed, overpriced and ready to do business when the sanction restrictions will no longer bite.

Espinas International Hotel in Tehran, Iran
Source: Espinas International Hotel in Tehran | Facebook
Espinas International Hotel in Tehran, Iran

In Yangon, multinational business visits began a while ago. In Tehran, they are rapidly escalating. In Myanmar, the financial markets will be launched soon. In Iran, the market cap of the Tehran Stock Exchange is over $130 billion.

After more than three decades of sanctions by the U.S., the EU and the UN, Iran could soon be open for business. Like Turkey, it has almost 80 million people. But unlike Turkey, it has not been able to reap the benefits of an emerging economy.

But will Tehran deliver on its promise? Well, that depends on Washington, Brussels and the UN.

Bilateral balancing acts

During the opening of the UN General Assembly, Washington and Tehran are likely to resume their talks. But each must cope with a difficult balancing act.

Washington is not willing to engage in nuclear concessions in exchange for support against the Islamic State, whereas Tehran would like Washington to show greater flexibility. After all, the Shi'ite Iran enjoys substantial influence in Iraq and Syria, whereas Sunni states would be apprehensive about a coalition in which Iran has a major role.

Tehran, too, has challenges. After surgery, the health of Supreme Leader Ayatollah Ali Khamenei remains unclear. According to some Western reports, Tehran is paving the way to the next supreme leader. Meanwhile, the nuclear talks are scheduled to resume in late November.

These so-called "P5+1" talks were initiated in 2006, when the permanent members of the UN Security Council — the U.S., China, Russia, UK and France — plus Germany joined the diplomatic efforts with regard to Iran's nuclear program. The talks intensified after June 2013, when Hassan Rouhani, a veteran politician who is seen as moderate in the West, was elected as president.

In November 2013, the negotiators reached an interim deal, which was the first formal agreement between the U.S. and Iran in 34 years. The summer extension of the deadline reflects efforts at a comprehensive compromise.

The West wants Iran to scale back its uranium enrichment program to ensure it cannot produce nuclear bombs. Iran argues its program is peaceful and wants to have sanctions lifted as soon as possible.

Both President Obama and German Chancellor Angela Merkel know only too well that if the West pressures Tehran too much, President Rouhani's pragmatic approach will be marginalized in Iran.

From Iran's standpoint, the U.S.-led sanctions have already damaged the oil-dependent economy. Although Tehran can access some funds under the deal terms, these are just a fraction of the more than $100 billion it holds abroad.

The talks during the UN opening and in November will determine whether investors should approach Iran as a potential emerging economy or as a source of further nuclear tension.

From sanctions to economic reforms

Only a year ago, Iran was still reeling from Western sanctions. As oil exports fund nearly half of Iran's government expenditures, U.S.-led sanctions have supported Tehran's geopolitical shift toward Beijing, which has ensured the funding of Iran's government operations.

Iran is one of China's core oil importers, accounting for 8 percent of its total oil imports. As Iranian diplomats began nuclear talks in New York City, Chinese warships docked at Iran's naval port to conduct joint naval exercises — for the first time.

Due to sanctions, Iran's oil exports have been halved to 1.1 million barrels per day in just two years. In the process, the EU and the U.S. have become more dependent on their current energy suppliers. As Iran was marginalized from the international banking system, the economy contracted. Inflation soared and foreign-exchange reserves shrank. The value of the rial plunged.

Instead of economic development and engagement, sanctions have fueled economic stagnation and insulation. Iran's unemployment rate climbed to 12-13 percent, while youth unemployment increased to almost 30 percent. Women's unemployment soared to 50 percent in some cities. Every fifth Iranian fell below the poverty line.

Most importantly, the sanctions diminished the prospects of Iran's business sector, which is vital to modernization, and its nascent middle class, which is crucial to democratization.

Return to growth?

Today, Iran is forging ahead with economic reforms. After two consecutive years of sharp contraction, it continues to cope with constrained prospects for oil revenues and international transactions. But the real GDP growth is stabilizing and even the inflation rate has decreased, thanks in part to central bank actions.

Nevertheless, Tehran's near-term outlook remains uncertain. The timeout may allow Iran's oil output to rise to 3 million barrels per day by 2015, which translates to an estimated 1.8 million to 2 million barrels in exports. But without a comprehensive deal, investment in Iran is not increasing.

During Iran's last fiscal year which ended in March, the economy shrank by 1.9 percent. In late September, at the end of the current Iranian calendar month, Iran's economic growth is estimated at 1 percent and could rise to 2 percent by March 2015 — despite the West's severe sanctions against Iran over its nuclear energy program.

Nevertheless, last Friday, Washington imposed sanctions on over 25 individuals and companies, including shipping firms, oil companies, airlines and six banks over alleged links with Iran. These sanctions were imposed despite ongoing negotiations between Iran and the six countries to reach a final agreement.

In the case of Iran, the interests of Washington's neoconservatives and Wall Street's investors seem to be diverging.

Commentary by Dan Steinbock, a research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore). See also