There is a long way to go before we can think of Iran as a “normalised trading partner” By Liam Halligan 25 Jan 2014 'Hassan Rouhani – a man we can do business with?” That was the question on the lips of many of the global movers and shakers gathered in Davos last week for the 44th World Economic Forum.
Amid the usual vapid spiel – this year’s gems included “reshaping the world” and “the deflation ogre” – some genuinely interesting geopolitics punched through at the annual Swiss gabfest. For the first time in a decade, the leader of Iran was there. What’s more, he was relaxed, laughing and talking incessantly about his “active foreign policy” to achieve his “economic goals”.
Such economic ambition is overdue. Last year, the Iranian economy shrank by 5.8pc and is now enduring its worst financial crisis for at least two decades, partly due to sanctions linked to Iran’s highly controversial nuclear programme.
No matter. The president of this pariah state is now Alpine hobnobbing, telling the world he wants “to remove all political and economic impediments to growth” through “constructive engagement” with the West. “Only with co-operation and engagement can we provide a better life for our people and make peace sustainable,” he told a packed, yet hushed, hall at Davos.
Rouhani’s message couldn’t be more different from that of his predecessor, the firebrand religious hardliner Mahmoud Ahmedinejad, who ruled for eight acrimonious years. Since his election last June, this 65-year-old seemingly moderate cleric, English-speaking and with a PhD in law from Glasgow Caledonian University, no less, has done much to start thawing the deep freeze in Iranian-US relations.
Iran wants to continue developing its nuclear power capacity, Rouhani insists, but has no intention of using its atomic capabilities as a weapon.
“Our country has never sought, nor seeks, anything other than peaceful technology,” he says. Such words have already gained enough traction to secure November’s interim agreement with Western powers, which came into force last Monday. Sanctions remain in place but have been eased in return for Iran curbing certain nuclear programmes – allowing much-needed foreign exchange to flow into the country. The threat of new sanctions looms, if Iran is judged to be in breach.
In the meantime, Rouhani is in hard-sell mode. “Iran is open for business,” he told the assembled delegates. “Come and visit us and see the investment opportunities”. The Iranian president insists that “over the next three decades” Iran can become “a top 10 economy”. The Davos crowd was left wondering if he was deluded, or if they’d just witnessed the Iranian equivalent of the fall of the Berlin Wall.
Crazy as it may sound, Iran could indeed become one of the world’s biggest and most successful economies. For one thing, its resource endowment is spectacular. With proven oil reserves of 157bn barrels – the third or fourth largest in the world, depending on how you count – Iran should already be a major crude exporter. Add to that, the country’s confirmed natural gas treasures – a cool 34bn cubic metres, second only to Russia – and you have the makings of an energy colossus.
On top of that, the Iranian population is highly skilled, with near-universal literacy. The country’s numerous universities are far from ideal, or gender-friendly, but the population is replete with qualified engineers and scientists. Back in the days when it was Persia, Iran had strong trade links. BP started life as the Anglo-Persian Oil Company back in the early 1900s, so the legacy of those links remains with us today.
Even relatively recently, Iran was rather prosperous. In the mid-1950s, the country’s real per capita gross domestic product was just four-fifths that of Turkey, its ancient rival and Western neighbour. Over the subsequent 20 years, though, free trade and economic dynamism meant growth was strong. By the mid-1970s, Iran’s GDP per head had soared to more than two-and-a-half times that of Turkey.
But then Ayatollah Khomeini came along and sparked the 1979 revolution. The resulting clampdown on enterprise meant the Iranian economy tanked. The isolationist ineptitude of the country’s theocracy meant Iran missed out on the emerging markets revolution that, from the 1980s onwards, saw the likes of China, Brazil and India grow like Topsy. Little wonder, then, that Iran’s GDP per capita today is, once again, behind that of Turkey.
Prior to Davos, and even prior to last June’s Iranian election, Rouhani gave numerous speeches extolling the virtues of economic integration, tapping into the strong appetite for change among Iran’s 80m-strong population, more than half of whom are under 35 years old. Now he’s promoting the idea of Iran as, potentially “the most exciting emerging market on Earth”.
The key, of course, is keeping sanctions at bay. Now the trade embargo has lifted slightly, Iranian oil exports should start nudging above 1m barrels a day – which would still be less than half what they were before this latest round of sanctions was imposed in 2011. The lifting of a ban on European companies insuring Iranian oil shipments, will also help – giving Rouhani a steady, if still constricted, stream of oil revenue to fend off shortages of imported food, medicines and other essentials. Yet banking sanctions will remain largely in place, blocking most hard-currency transfers to Iranian government accounts.
If these are to be lifted, Rouhani must play ball, not just in terms of diplomacy, but resources, too. On the fringes of Davos, the smiling cleric met a group of Western oil majors, detailing the conditions under which they could return to Iran, promising to produce workable oil exploration contracts later this year. There is no reason, given goodwill on both sides, why Iran shouldn’t quickly return to exporting close to 3m barrels a day, as it was during the mid-1990s. During the pre-revolutionary heyday, back in the early 1970s, Iran was exporting more than 5m barrels daily. Restoring those kind of levels would make Iran twice as important a supplier as Kuwait – a prospect that would go a long way towards easing the tight global energy market, providing a major boost to energy-importing Western economies.
There is, of course, a very long way to go before we can think of Iran as, in Rouhani’s words, a “normalised trading partner”. Yes, the world is tired of Middle-Eastern turmoil, but it isn’t going to abate until some pretty intractable issues are resolved. When pressed if he wanted good relations with all Iran’s neighbours, this apparently doveish president said: “Yes – those we officially recognise.” Israeli prime minister Benjamin Netanyahu later dismissed Rouhani’s speech, asking reporters to distinguish between a “change in words and unchanging deeds”.
It is worth remembering, amid such difficulties, that trade and mutually-beneficial commerce are the best way to restrain conflict. Japan and China, for instance, have been at daggers drawn for centuries. Tensions still abound – witness the current spat over the Senkaku and Diaoyu islands, and their related mineral rights. Yet trade volumes between these two sworn enemies are now soaring – a commercial symbiosis that, in the end, will help to keep the peace.
“Economics is for donkeys,” AyatollahKhomeini said in the early 1980s. Meanwhile, Deng Xiaoping was taking steps to unleash the Chinese economy, paving the way for 20 years of double-digit growth – a lesson the new Iranian president seems to have embraced.
“Is Rouhani Iran’s Gorbachev?” That was another question doing the rounds at Davos. Far from wanting to dismantle the ghastly Soviet system of central planning, though, Mikhail Gorbachev actually tried to tweak it in order to save it. Gorbachev was bold, yes, but given the obstacles he faces, both at home and abroad, we must hope Rouhani is far bolder.