World Economy

How oil sanctions may have HELPED Iran’s economy

Tough sanctions on Iran that hammered its oil exports may have helped the country cope with the commodities slump by forcing it to diversify its economy.

Iran's economy shrank in 2012 and 2013 after the West tightened sanctions because of its nuclear enrichment program. However, its economy was growing again by 2014, despite oil output falling to around 1 million barrels per day and crude prices collapsing.

Two veiled women look at smart phone brands in Paytakht computer mall in Tehran, Iran.
Kaveh Kazemi | Getty Images

At a conference on Thursday, experts in the region attributed Iran's growth partly to policy efforts that now mean its economy is less dependent on crude exports than its Middle Eastern peers.

"Many of Iran's neighbors are even more dependent on oil … It is much more diversified than others in the region," Aasim Husain, deputy director of Middle East and Central Asia at the International Monetary Fund, said at a London conference on Iran hosted by media company Euromoney.

Iran's economy is seen growing by a healthy 4 percent this year by the World Bank, since the easing of Western sanctions in January. The country has hiked crude production since then and media reports on Wednesday, citing the Iranian oil minister, suggested policymakers were aiming to reach four million barrels per day by March 2017.

"I think ultimately Iran does not need to export crude or raw materials — we should export petrochemicals or other added-value materials," Amir Mehran, head of foreign assets and investment management at Iran's Bank Pasargad, said on Thursday.

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Husain said higher oil output would boost the economy for the next 12-15 months, but that increasing production substantially would require better infrastructure and access to finance.

"Iran needs to reconnect with the international financial world," he said.

Iran has attracted great interest from investors since sanctions were lifted and has the second-largest economy in the region after Saudi Arabia and the second-largest population after Egypt. Its competitive advantages include cheap labor; a young, highly-educated population and inexpensive and reliable energy sources.

However, investors are largely sitting on the sidelines, nervous on the mishmash of remaining sanctions and whether its rapprochement with the West will hold.

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One-quarter of senior U.K. executives listed the remaining U.S. sanctions as their top concern about doing business in Iran, in a survey published by law firm Clyde & Co on Wednesday. One-third of the 100 executives surveyed in person said they would be uncomfortable even talking to their banks about wishing to do business in the country. Under half knew what level of "due diligence" would be required and one-third said they could not get insurance cover to do to their proposed business activities in Iran.

Iranian bankers, corporate leaders and politicians are busy attempting to drum up investor interest at conferences such as Thursday's in London.

"We aren't there yet — we don't have the corresponding banking relationships that we want. The large international banks are not accepting Iranian business — with some exceptions," Mehran said on Thursday.

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In the meantime, pushing inflation below 10 percent is a priority for Iranian policymakers, as is reforming the banking sector. They hope to develop the public debt markets and establish asset managing companies to handle Iranian banks' high levels of non-performing loans.

"How to secure long-term, stable growth in a highly uncertain world — this is the most challenging issue. You cannot tell what is going to happen, but you still must make plans," Vali Zarrabieh, co-founder of Iran's Saman Bank, said on Thursday.

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