In the two months since Iran’s nuclear sanctions were officially lifted, the country has already come a long way inrestoring business relationships with the west. Melodie Michel gives a round-up of the latest developments.
When this journalist visited Tehran in October 2015, the topic of Iran’s trade reopening was still largely under the radar – yet a few days spent there made it clear that things would start moving much faster than initially anticipated. Fast-forward five months, and it is impossible to find one trade conference or networking event where Iran is not a major topic of discussion.
Implementation Day happened just six months after the signing of the Joint Comprehensive Plan of Action (JCPOA), on January 16, and since then every day there is news of a new presidential visit, trade delegation, commercial contract or memorandum of understanding with the country. The world has not witnessed the sudden reopening of such a large economy since the fall of the Soviet Union in the 1990s, and everyone wants in on the action.
Of course the market still presents tremendous challenges – the largest being the extreme caution banks are adopting regarding the country – but progress is undeniable.
Trade finance resumes gradually
Swift officially announced the completion of the onboarding process for delisted Iranian banks on February 17, through a statement published on the country’s central bank’s website and verified by Reuters.
“We will continue to work with the remainder of the entities that have applied to rejoin Swift to ensure their smooth reconnection,” Swift UAE country manager Onur Ozan says in the statement.
In an exclusive interview broadcast at the GTR Mena Trade Finance Week in Dubai in February, Iran’s deputy minister for industry, mines and trade, Mojtaba Khosrowtaj, explained: “I had the opportunity to be in contact with our commercial banks yesterday [February 14] and they told me that they have been successful in opening letters of credit or transferring money to any destination. But this doesn’t mean that they have correspondent banks in all countries. In some countries they have partners to do these transactions, but they are still looking to do this kind
of job with the big banks in Europe.”
During a panel about Iran, EGFI (the country’s ECA) board member and deputy CEO Arash Shahraini told the audience that a number of Italian banks, including Mediobanca, had reopened their business with the country.
Small regional banks in Europe with few US interests continued to do business with non-listed Iranian banks even during sanctions, but there have been concerns that bigger financial institutions would not go back to the market for fear of violating remaining US sanctions.
However, off-the-record conversations at the event revealed that a large northern European bank was starting transactions “on a case-by-case basis” in mid-February, and that another large UAE-based bank was open to handling Iranian business. It appears as though banks of an increasingly significant scale are reopening their Iranian business in a very careful and compliant manner, but very few of them are willing to publicise it.
Investment and trade deals start flowing
This is good news for the hordes of global corporates waiting to jump on the Iranian bandwagon, and for those that have already signed contracts with the country’s companies: Iranian President Hassan Rouhani’s four-day visit to Italy and France at the end of January resulted in the signing of €40bn of trade deals.
Among the biggest deals signed by Rouhani in Europe were a €22bn order for 118 commercial passenger planes from Airbus, including 12 A380s; a €5.7bn contract with Italian metals industry firm Danieli for the supply of heavy machinery to Iran, a €3.5bn agreement for Italian oil and gas contractor Saipem to renovate the Pars Shiraz and Tabriz oil refineries; and a €400mn joint venture between Peugeot and Iran’s Khodro to modernise a car factory near Tehran.
Total also reportedly agreed to buy as many as 200,000 barrels of crude oil per day from Iran, though it is not clear when the purchases will start. Additionally, Aéroports de Paris, Bouygues and Vinci are said to have signed contracts to upgrade airports in Tehran and Mashhad.
The firms were the first to sign binding contracts with Iran since the lifting of nuclear-related sanctions, but many have followed since.
Swiss-based shipping company MSC has signed an MoU with the Iran Ports and Maritime Organisation (IPMO) to increase port calls at Bandar Abbas, Chabahar and Bandar Imam. The agreement also involves MSC vessels, which returned to Iran in January after six years, carrying shipments to Iran from international ports, and effectively opens up Iranian investment opportunities to Swiss shipping firms – as agreed during a three-day visit by Swiss President Johann Schneider-Ammann at the end of February.
Still in the shipping sector, Oman’s port of Salalah has signed an MoU with Iran’s Shahid Rajaee and Chabahar ports, to develop and promote an all-water route between the three ports, representing a roundtrip of 2,152 nautical miles. This will ultimately support increased trade and investment between the two countries.
It is worth noting the prominence of Chabahar port in Iran’s investment news, as this is considered a strategic infrastructure project for the country.
On March 2, Siemens signed a number of agreements with Iranian construction group MAPNA in order to modernise the country’s energy infrastructure. The MoUs include a licence agreement under which MAPNA will acquire technological know-how to manufacture Siemens F-class gas turbines in Iran. According to Siemens, the parties will co-operate to deliver more than 20 gas turbines and associated generators over the next decade.
As a first project under the licence agreement, the companies signed a contract for the Bandar Abbas power plant, for which Siemens will deliver two F-class gas turbines and generators.
The two companies also signed an MoU to jointly develop the roadmap for the extension and optimisation of the overall Iranian power and electrification system, including power generation, transmission and distribution, but also providing solutions including EPC (engineering, procurement and construction) as well as financing options.
A Ukrainian delegation visited Tehran in early March, and reportedly signed a number of agreements with the Iranian government, including one aiming to resume bilateral energy co-operation. This will help increase the efficiency of Iranian power plants and high-voltage transmission lines.
The two countries are also said to have signed an MoU for the expansion of economic co-operation in the fields of agriculture, metals, mining and aviation.
Settling debts with ECAs
The reopening of export credit agencies’ coverage for Iran is also expected to boost trade and investment. EGFI and its UK counterpart, UK Export Finance (UKEF) signed an MoU on March 5 to enhance trade and economic co-operation between the two countries.
Under the MoU, the two ECAs will work together to identify opportunities for trade in capital goods, equipment and services. The agreement also allows the parties to co-finance and co-guarantee financing for projects or contracts in third countries involving British and Iranian exports.
Iranian media have also reported that Iran had agreed to clear its US$560mn of cover debt with Germany’s ECA, Hermes, by September, before Germany resumes providing guarantees for German exports to the country.
These latest agreements follow those signed at the end of January with France’s Coface and Italy’s Sace on outstanding payments (€564mn in the case of Sace) owed by Iranian debtors due to the sanctions that largely blocked money flows. These agreements are expected to pave the way for the reopening of ECAs’ guarantee lines and a return to business as usual in Iran.
The number of MoUs signed by European ECAs with Iran is in contrast with the attitude adopted by the US Export-Import Bank (US Exim): in an interview with GTR in early February, chairman
Fred Hochberg, said the bank “[would] not be doing any business there”. “Iran is still closed to US companies. President Obama has made enormous progress but in terms of trade, it’s still closed. I don’t know what the future is but they’re still registered as state sponsors of terrorism,” he added.
This will undeniably put European exporters in a better position than their American counterparts, particularly in the aviation space: Iran Air is said to need as many as 500 new planes to renew its fleet. Airbus has already signed a contract, and Boeing (a large user of US Exim products) is reportedly also in discussions with the airline, as aircraft and aviation equipment are some of the exceptions from the US trade embargo that remains in place.
Meanwhile, Iran is reportedly in negotiations to buy 50 airliners from Brazilian aircraft manufacturer Embraer, and Brazil’s trade minister has announced that the country would accept payments in euros and other currencies to bypass US dollar restrictions.
Oil contracts will take some time
One of the most important aspects of Iran’s strategy to attract foreign direct investment is the redrawing of its oil contracts, which have been criticised in the past
for being too one-sided and not allowing foreign firms to make profits.
According to Elham Hassandazeh, managing director of Iran-focused energy consultancy Energy Pioneers, who spoke to GTR on the sidelines of its GTR Mena Trade Finance Week in February, the contracts currently being drafted are very attractive, and make Iran’s relatively low cost of production even more appealing in today’s price environment.
The problem is domestic: the oil ministry is under huge pressure to revise the current terms, which are perceived by political hardliners as giving too much advantage to foreigners. The tension became obvious when Iran cancelled the long-awaited presentation of the new contracts, which was due to take place in London on February 22. While the delay was not welcome, the significant rejection of the “principlists”, a coalition of hardline conservatives, in the parliamentary election that took place at the end of February bodes well for a quick resolution to the contract debate domestically.
Moreover, Iran cannot afford not to offer attractive terms for foreign oil companies, especially since reduced liquidity in the sector has made the market incredibly competitive.
The biggest obstacle to international co-operation in the oil and gas industry is not contracts – it is the fact that Iranian companies are “not ready”, Hassandazeh believes. She explains that in order to get foreign investment, they need to align their financial documentation and business processes to international standards. “I take investors to petroleum companies in Iran and at the meeting they speak different languages,” she says.
This is very specific of the oil sector, which was directly targeted by sanctions and therefore has been cut off from global markets for years. And considering that international companies are required to have a local partner to make investments in Iran’s upstream sector, this disconnect is significantly blocking progress.
Hassandazeh remains very optimistic, adding that the opportunities are too appealing to be missed. According to her, the Iranian government could issue a first round of tenders from the start of Q3 2016, with the first contracts not expected before the end of 2016 or even later for the largest projects.
Asia bets big
While there is a lot of noise coming out of Europe, the largest investment deals are undeniably coming from Asia.
Chinese President Xi Jinping was the first to visit Tehran after the sanctions were lifted, and his meeting with Rouhani resulted in a pledge to raise bilateral trade to US$600bn within a decade.
No fewer than 17 accords were signed to deepen ties on energy and infrastructure and cement China’s position as Iran’s primary superpower ally. Bilateral trade ties are already very strong: China has been Iran’s largest trading partner for six consecutive years. Trade between the two has increased four-fold since 2005, while Chinese state-owned enterprises have been investing in Iranian projects for many years.
“Chinese imports from Iran are dominated by energy imports. Iran provides 8.9% of Chinese oil imports. In addition, China is the largest provider of goods to Iran. The market potential of Iran is very significant for Chinese exporters, for example in the automobile and high-tech sectors,” Moritz Rudolf of the Mercator Institute for China Studies tells GTR.
Iran is also expected to become an important hub on China’s One Belt One Road (OBOR) infrastructure splurge, with the country’s fledgling high-speed rail network thought to be a focus of Chinese investment.
In February, Iran signed its first post-sanctions financing agreement with US$150mn from the Export-Import Bank of India (India Exim), for the import of 150,000 tonnes of rail tracks from India. This is related to a Chinese contract to finance the electrification of the Tehran-Mashhad train line.
The Indian government has also approved US$150mn of financing for Iran’s Chabahar port. The port will give India sea and land access to Afghanistan, bypassing Pakistan. A statement issued by the Indian ministry of shipping says: “India is negotiating this project to facilitate the growing trade and investment with Iran and other countries in the region, notably Afghanistan and also to provide opportunities to Indian companies to penetrate and enhance their footprint in the region.”
India is also a major importer of Iran oil, and its purchases rose by over 20% to 215,500 barrels per day between January and February following Implementation Day.
In March, South Korea pledged €5bn to projects in the country, a deal which followed similar agreements between Kexim – South Korea’s export credit agency – and the Iranian government worth €8bn, and according to sources in Iran, took Korea’s exposure in Iran to over US$15bn.
The South Korean trade ministry expects annual bilateral trade will rise by US$11bn from 2012 levels over the next two years. Industry and energy minister Joo Hyung-hwan says: “We maintained our relations with Iran during the sanctions and we are willing to start a new phase of co-operation in the post-sanctions era.”
Iran remains Korea’s third-largest export market in the region and last year, Kexim voiced hope that Korean firms could be involved in energy projects nearing US$60bn in value.
The countries also agreed a maritime pact which covers shipping and fisheries. This will allow ships from each respective nation freer passage through the other’s waters and may also allow Korean firms – which have renowned expertise in maritime projects – access to a host of initiatives expected to be announced by the Iranian government soon. Steel giant Posco has already signed a memorandum of understanding to help construct a US$1.6bn steel mill in the Chabahar port.
Additional reporting: Finbarr Bermingham