Why there are still deals to be done in Iran

For all the drama of Trump’s high risk decision to pull out of the Iran nuclear deal, he may not have killed it off entirely. A new one could even include America. For Trump does accept the Joint Comprehensive Plan of Action’s central principle – Iran gaining access to the rest of the world in return for denuclearisation – but he wants relief from sanctions linked to constraints on Iran’s broader actions, not least in Syria. And he insists restrictions on the nuclear program must also be permanent, removing “sunset clauses” in Obama’s 2015 deal.

“We want no nuclear weapons in Iran now, not in seven years, not in 20 years,” said Treasury Secretary Steven Mnuchin, after Trump’s announcement. “If Iran is serious, they will sit down and negotiate.” It seems apt that it was the Treasury Secretary who uttered these words. For the upcoming negotiations over JCPOA – and there will be negotiations – could swing on economic and business imperatives.

After the 2015 sanctions-lifting agreement, Western companies moved quickly to invest in Iran. President Rouhani – a moderate, pragmatist compared to recent predecessors – said his people “want to join the rest of the global economy”. At international summits, including Davos, he positioned Iran as “potentially, the most exciting emerging market on earth”.

Even under sanctions, Iran was a top-25 economy. Its 82-million-strong population is largely untapped by Western conglomerates – and has a median age of  28, auguring well for rapid economic expansion. The workforce is near-universally literate, with plenty of well-qualified engineers and scientists. Yet average wages are lower than China. Then there is the stellar resource endowment, with Iran boasting world-class reserves of both oil and gas.

These fundamentals saw European investors pile in after JCOPA, keen to access Iran’s wealthy middle-class. French manufacturer Peugeot Citroën opened an Iranian plant and last year sold 444,660 cars in the Islamic republic, over a fifth of all its sales worldwide. Renault also did a multi-million dollar factory deal, selling 162,100 cars in Iran last year.

Germany’s exposure is also considerable. Around 120 companies operate in Iran, with another 10,000 doing business there, according to the German-Iranian Chamber of Commerce. Exports to Iran grow 15% to $3.3 billion in 2016 – led by Volkswagen and Daimler. Siemens is building locomotives in Tehran, alongside a $1.3 billion German-backed credit line to help upgrade the 1,000km Tehran-to-Mashhad railway.

Among the bulge-bracket post-JCPOA agreements, Total of France signed a $5 billion deal with Iran and a Chinese partner to develop the massive South Pars offshore gas field. French aerospace giant Airbus won a $19 billion contract to sell IranAir 100 new planes. Its US rival, Boeing, secured a $17 billion agreement to supply the same carrier with another 80 aircraft, and a $3 billion deal to build Iran’s Aseman Airlines 30 more planes.

But Boeing has yet to deliver a single aircraft to Iran – for fear of upsetting the US government. Airbus, too, mindful of the same sensitivities, has supplied just three planes so far. Some Airbus components are US-made, so the firm needs Washington’s permission to enact Iranian sales –which has been very slow in coming.

The reality is that, despite JCOPA, Western business in Iran has continued to be constrained by official and unofficial US diktat. Most obviously, Iranian banks have remained excluded from the vital US-controlled “swift” international payments network – a major obstacle to all foreign firms looking to do business there.

Now sanctions are to be re-imposed, those obstacles will get higher still. European officials – particularly in France and Germany – have spent recent days trying to shield their companies with Iranian interests, amid growing US pressure. “German companies doing business in Iran should wind down operations immediately,” tweeted America’s Berlin-based Ambassador ominously, after Trump’s announcement.

As @realDonaldTrump said, US sanctions will target critical sectors of Iran’s economy. German companies doing business in Iran should wind down operations immediately.

— Richard Grenell (@RichardGrenell) May 8, 2018

European JCOPA signatories want Iran’s non-proliferation deal to continue, with or without the US. But regardless of where they’re headquartered, virtually all multi-nationals do business or banking in the States. So Washington can punish them if renewed sanctions are flouted. Forced to choose between Iran and the US, even the most powerful European corporates will toe the line. So US pressure can be brought to bear on Tehran, even if some growth-boosting Western investments are ultimately exempted from sanctions. There are clearly deals to be done.

Trump may conceivably soften his line on JCPOA if Rouhani, who has faced down Iran’s theocrats to argue for better relations with the West, looks like being ousted. The US President may also be mindful that ditching a UN-backed deal, without proof of Iranian non-compliance, could undermine efforts to denuclearise North Korea.

What could ultimately temper Trump, though, is the oil price. Already 50% up over the last year, crude is now firmly above $70 a barrel. Since sanctions were lifted, Iran has reemerged as a major supplier, pumping almost 3 million barrels a day, over 3% of global demand. So renewed sanctions could cause a major supply squeeze – which is why Trump’s JCOPA move drove crude to a three-year high.

Saudi Arabia wants to see oil spike before Riyadh sells part of its massive Saudi Aramco oil complex later this year. With Venezuela due to hold sham elections later this month, Washington may also want to sanction the ghastly President Maduro – further constraining global crude supplies.

Against that backdrop, if US sanctions on Iran really bite, oil could shoot above $100 a barrel – good for the Texas shale producers, but throttling America’s broader economic recovery, ahead of November’s Congressional mid-term elections. However much he wants to out-muscle Iran, Trump certainly won’t want that.

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Liam Halligan writes his multiple-award winning weekly “Economics Agenda” for The Sunday Telegraph. A panellist on CNN Talk, he has previously worked for The Economist, Financial Times and Channel 4 News.

LiamHalligan