Changes in Western policy have opened the way for Iran's re-integration into the global economy, but how will this effect other regional energy producers? Who stands to gain and who stands to lose from the Iran deal?
A New American Foreign Policy Creates New Economic Opportunities
American foreign policy in the last year looks like something that a mid-2000s dime-store author might have written as an alternative history novel. In the years after the terrorist attacks of September 11th, 2001, the United States was focused on bringing democratic regimes to the Middle East and ignoring or doubling down on the entrenchment of antiquated Cold War relationships. In just a few months, the culmination of a seven-year build-up of pointed sanctions and overtures, much of this has changed. In a similar sense, the Obama administration’s opening of relations with Cuba opens up similar analyses like the one to be done here but in the American economic sphere. In short, the new way of major-power foreign policy (we should not forget that America did not engage in these rapprochements unilaterally) will undo major discontinuities in the international economy. In terms of the Iran deal, the dynamics of transactions between Eurasian economies could see significant shifts in the next two years.
What kind of Iran is Entering the Market?
Iranian industry and commerce is quickly taking stock of where its comparative advantages lie. The Heckscher-Ohlin Model of trade suggests that free-trading states will focus on production of their abundant factor, and import that which it cannot produce efficiently. Iran could not engage with many states like this under sanctions, but now Iranian energy reserves could be a more opportune source for Western customers, and some of the necessary infrastructure is already being refurbished. Additionally, Iran has a relatively strong and well-educated middle class, who can staff white-collar jobs from interested foreign investors. Tehran is likely to see a strong increase in financial and business services in this regard. Most importantly for Western interests, dropping sanctions will bring millions more middle class consumers to their markets who will line up to buy from Europe. Put simply, there is more than $100 billion that could potentially be added to the Iranian economy in the coming year, if milestones of the deal are met. Dropping sanctions is therefore a lucrative opportunity, but not for all, so let us explore who the winners and losers are.
When large enough economic players enter the market after times of isolation, the economic balance gets reshuffled. International Political Economy offers up a feast of analysis on how different political entities line up – typically hungry and with empty plates. With Iranian entrance to larger trade markets, there are bound to be winners and losers.
Because of the aforementioned thirst for Iranian energy, and domestic thirst for light industry and business services, Iran is in prime position to interact with Western markets, namely Europe, in this symmetry of comparative advantage. European exports (namely German light and heavy industry) is paradoxically benefitting from the Euro’s depreciation and cheaper energy. These events have made Eurozone exports relatively cheaper to ship and purchase and thus more competitive globally. Iranian middle-class consumers are likely itching to drive a BMW or Mercedes to work for much cheaper than is currently possible.
Other overlooked beneficiaries of an economically integrated Iran are the countries between the two markets that will likely exchange goods. The most likely beneficiaries in this regard are Georgia and Azerbaijan. Transiting these good through the South Caucasus avoids less favorable legal structures in Russia, and the high cost of transiting energy and goods through the Suez or around the horn of Africa. A new pipeline expansion project run by BP just broke ground in Georgia that could provide the infrastructure necessary to calmly deliver Iranian hydrocarbons to European markets, thirsty for an alternative source to Russia.
Major energy producers stand to lose the most. It is rare when a World Bank quarterly report makes international headlines, but modeling done by the development bank suggests that world oil price will drop a further $10 with unfettered Iranian access to Western markets. Put in context this is even more significant:in a world of $100 oil this is a 10% drop. In a world of $50 oil, it is a much more significant 20% drop in an already cheap world energy market. This publication has already explored how Russia has made itself vulnerable to the economic policies of Europe, and a new Iranian player will only further exacerbate this dynamic. This would have a similar and equally important effect on Saudi Arabia’s profit-driven energy empire. Iranian interaction is in the interest of Western powers in this regard.
Western interaction is therefore crucial to a peaceful roll-back of sanctions. Ambivalence or unwillingness to interact with a freely-trading Iran could easily shift them to the loser’s category. Their investment, and ability to import manufactured goods could easily be substituted by East and South Asian countries like China and India – who account for 58% of all Iranian exports according to the World Bank report. Either the West will buy-in, or be quickly left behind.
Conclusion: Economic Transition – Death by a Thousand Profit Margins to Autocratic Regimes When Done Right
This piece has established the high potential of Iran’s potentially newfound interaction with the West in a sanction-free environment. However, there is another positive externality at play in this arrangement that might be the most profound when it comes to diplomacy and international politics. Much like Europe used economic integration and entanglement to prevent conflict in the post-war decades, Iran could potentially endogenously reform its less-than-desirable political system in the face of economic prosperity. It is hard to argue with inflated bottom lines, and strong growth numbers could ensure that moderate factions keep winning in Iranian elections in the foreseeable future. However, examples like the Soviet Union and China suggest that this is a path best walked very carefully.
Any trade relationship with the West is also going to demand the due-diligence and transparency that the transatlantic partnership already enjoys. In this sense, corruption and rent-seeking behavior will simply become less profitable, in the face of transparent Western money. Put simply, $200 of profit is simply arithmetically more than $100 in a collected bribe to a sanctions-dodger. While this is difficult to game at the moment, it is likely to be the outcome as these rent-seeking gates are dropped in the absence of sanctions. In this opacity lies an opportunity to potentially make the reality desired by European capitalists, if done the right way. Europe would be well-served to start this process sooner rather than later.
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