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Iran- too soon for optimism?

15 January 2016 |

Cheers greeted the announcement of the lifting of sanctions against the Islamic Republic of Iran, many Iranians hungry for change from an economy that had stagnated, inflation running riot and a political elite seemingly at odds with the population they deem to serve. True indeed, much of the world, if not the Israeli government as well as their allies in Congress, see this as a historic opportunity to not only reach peace in the Middle East, as well as profit from a hugely robust and populous country, blessed with countless natural resources. However, assuming the process of rehabilitation into the world system does go ahead without hindrance, there are still reasons to be wary of the hope that the election of Hassan Rouhani seems to have offered.

A population of 77 million, greater than that of Turkey, means a huge untapped pool of resources, not only as workers but also as consumers of goods, makes Iran an optimal stop for investors seeking to maximise returns. With an urban population close to 80%, this allows a huge market close to urban centres, making distribution of goods remarkably easy for a developing nation. And with a large middle class, often exposed to western culture and hence consumerism, through the exploits of Iran musicians and actors, it does not seem a hard task to convince Iranian’s to part with their Rials for durable goods. The recent opening of the Palladium Shopping Complex in North Tehran led to huge crowds, demonstrating an appetite not only for clothes and technology, but also services. TNC’s, freed by the removal of sanctions, would surely be foolish not to exploit the opportunities on offer.

But among the rays of sunshine dazzling the Persian Gulf, clouds do remain, constantly on the horizon, unknowing whether they will clear or continue to obstruct the view. Firstly, the lack of intellectual property rights make it very difficult to justify investment if you can be undercut by cheap knock-offs being sold down the road. The prevalence of D&G belts, Versace shoes and Louis Vuitton wallets would not be lost on prospective companies, realising that at such a cost differential, it would be difficult to compete with a black market that has been protected by a lack of external interference as a result of years of isolation. Secondly, even if such hurdles were overcome, corrupt practices would discourage external companies from involving themselves within the country. Where industry leaders have close ties with the political elite, exchanging protection of their business interests for economic support and provisions, it is unlikely they would take too kindly to external competition and would lobby against their market share being eroded. The recent opening of a Marks & Spencer store in Tehran received such opposition that it had to be postponed.

But most strikingly, economic activity occurs best when the political and geographic situations are secure. Certainly in Iran’s case, neither is true: both Israel and Saudi Arabia are known to have contemplated military action against the nation at some point. Meanwhile over the border, IS continues its surge through Iraq and Syria (which itself is experiencing a 3 year civil war) and although Iran is unlikely to witness invasion, will be destabilised by the situation. Given the typical oil project can have a long lead time of up to 5 years, such instability is a huge cause for concern. Politically, the elevation of Rouhani may just be a short term liberalising, similar to the term of President Khatami, which was followed by a period of stagnation with the west. Despite recent improvements, the political system is still controlled by the Supreme Leader and the Guardian Council (a council of religious figures that controls policy and vets candidates for election) and heavyweights such as Ayatollah Jannati still play a key role in controlling policy and discourse. Without a clear commitment to political reform, as well as tacit consideration that international diplomacy is the order of the day, it is hard to inspire belief that long term reform and stable political institutions will truly co-exist to allow for economic growth.

So whilst we can take great heart that the situation is improving, Iran is not the bottomless pit of opportunity that will keep giving, and only by nursing the situation discreetly, will we truly see the blossoming of a country with 10% of the world’s oil reserves.