Iranian President Hassan Rouhani will be yucking it up at Davos this week, munching canapés, shaking hands and cutting deals with the global business elite. His message: Iran is open for business as the international sanctions regime begins to unravel. His nuclear chief bragged on Iranian state television that the "iceberg of sanctions is melting while our centrifuges are also still working."
The Obama administration disagrees: "Iran is not open to business," an official told reporters this week. "Nobody should misunderstand that point."
The Obama administration and its European allies are confident that, with the Geneva agreement that addresses Iran's illicit nuclear program having been implemented on Jan. 20, their carefully constructed Iran sanctions' architecture will not be eroded-that is, until they decide to lift the toughest sanctions in exchange for a final nuclear agreement.
The argument is this: Should Iran renege on the deal, the limited concessions the United States and other world powers are offering Iran in exchange for the dismantling of its illicit nuclear program are easily reversible. They are also adamant that the total value of sanctions relief is only $7 billion. "It's not going to be hard for us to turn the dials back or strengthen sanctions even further," President Obama claims, adding that he would "work with members of Congress to put even more pressure on Iran, but there's no reason to do it right now."
Regrettably, the administration and its allies may be wrong on all fronts. Bijan Khajehpour, a Vienna-based Iranian investment manager close to the Iranian government, noted, "the beginnings of a ‘gold rush' mood in Tehran." Though that might be overstated for now, his imagery reflects the beginnings of a shift in market sentiment that the interim agreement unintentionally but predictably triggered. If Iran's economy recovers, the pressure on Iran's leaders to follow through on a nuclear deal lessens. At that point, President Obama may discover that he has lost negotiating leverage and can't turn sanctions off-and-on like a "dial."
Here's why: A cash infusion of $7 billion into Iran's troubled economy might not sound like a lot in today's world. But it represents roughly 35 percent of Iran's fully accessible overseas cash reserves, which are estimated at $20 billion. And the sanctions relief figure might be much higher and more difficult to reverse.
For one, the $7 billion figure does not factor in the psychological impact the Geneva deal has had on markets, businesses, and investors.
Before Nov. 24, when the framework agreement was signed in Geneva, even those who could conduct legitimate business with Iranian counterparts were hesitant to do so. Driven by fear of economic loss and legal sanctions, they were risk averse. The world had built an economic minefield around Iran that most businesses were loath to risk exploding.
The tide may now be turning. Though many legal restrictions remain in place, sanctions are as much about psychology as legalities. Greed is starting to overcome fear. Trade barriers, particularly in areas that are legal but frowned upon, have been significantly reduced. This has already improved the economic climate and already resulted in some illegitimate deals as companies test the waters. With the expectation of further sanctions relief soon, businesses might now take risks they would not even contemplate as recently as three months ago.
Just how good is the new economic climate in Iran? Trade delegations are flocking there to explore business deals. Companies are rushing to apply for export licenses to exploit the newly open humanitarian channels, which, for the first time since the U.S. Embassy takeover in Tehran in November 1979, will include civil aviation components' exports to Iran. Chambers of Commerce and industrial councils are organizing seminars to help companies navigate the vagaries of the newly relaxed sanctions' regime and offer advice-as well as connections-to advance business with Iran.
There is also the remarkable recovery of the rial. After a three-year free fall that took Iran's currency from the official 10,308 to $1 dollar rate in 2010 to a crippling 38,500 in September 2012, the rial has now climbed back to 24,873 (as of January 21). Global auto companies are returning to Iran to renew business relationships in a sector that, until sanctions, provided almost $50 billion in annual Iranian GDP. Iran's stock exchange is also surging on renewed investor confidence, including in the petrochemical sector, which experienced steep price rises immediately after the Geneva agreement was signed.
More broadly, the Iranian economy, which had been beset by high unemployment, negative growth and hyperinflation, has been showing signs of modest growth and stabilization since sanctions pressure eased starting in mid-2013 and expectations of an economic recovery soared after Rouhani's election. And that was before the Jan. 20 implementation of the Geneva deal.
According to the World Bank's most recent data, Iran's GDP shrank 2.9 percent in 2012 and 1.5 in 2013, but it is now expected to grow by a modest 1 percent this year, and 1.8 percent in 2015. The IMF also sees Iran's economy beginning to rebound with an estimated growth rate of 1.3 percent and 1.98 percent in 2014 and 2015 respectively.