Iran’s Foreign Economic Relations in the Region

 
PIIS086919080007061-4-1
DOI10.31857/S086919080007061-4
Publication type Article
Status Published
Authors
Occupation: Leading Research Fellow, Center of Near and Middle Eastern Studies; Head, Department of Iranian Studies, Institute of Oriental Studies, Russian Academy of Science; Associate Professor, Department of Global Economy, MGIMO, Ministry of Foreign Affairs of th
Affiliation:
Institute of Oriental Studies of the Russian Academy of Sciences
Moscow State Institute of International Relations (MGIMO)
Address: Moscow, Moscow, Russia
Occupation: Junior Researcher
Affiliation: Institute of Oriental Studies of the Russian Academy of Sciences
Address: Russian Federation
Journal nameVostok. Afro-Aziatskie obshchestva: istoriia i sovremennost
EditionIssue 5
Pages106-113
Abstract

The article surveys the statute and key drivers behind Iran's foreign economic activity with the region’s countries: Middle and Near East, Central Asia, the Caucasus, South and Southeast Asia. The authors provide an analysis of the dynamics and structure of Iran’s foreign trading activity with the key counterparties based on the statistical data of international and national organizations. The article's key focus is the current status and the outlook for Iran’s economic relationship with Eurasian countries via the bilateral relations and its membership in regional organizations. The authors assess the impact of new US sanctions introduced by the D. Trump administration against Iran on the Iran’s foreign economic policy. The underlying trends of Iran's oil export, the country's largest source of hard currency income and reserves, as well as triggers affecting the supply of Iranian crude oil to the global markets are reviewed in the article. Over a few years, due to constant strengthening western sanctions regime against Iran's nuclear program, China has turned into a largest importer of Iranian oil and Iranian non-oil exports, accounting for over 26% in Iran’s foreign trade nowadays. The issues Iran has faced in the light of a new round of US sanctions of May 2018 may possibly affect both the positions of countries-importers of Iranian oil and overall the investment potential of the large Iranian market. The authors undertake an attempt to evaluate the influence of new US sanctions on Iran’s investment cash flows. Authors further suggest that the financial vehicle to support the trade with Iran, initiated by Europe in order to fulfill the signed in Vienna in 2015 Joint Comprehensive Plan of Action (JCPOA), might be ineffective. The authors highlight the reactivated sanctions trigger the revival of Asia's economic relationships with Iran which may create upside risks for tension increase in the region.

KeywordsIran, foreign trade, sanctions, exports, oil, imports, investments
Received06.10.2019
Publication date16.10.2019
Number of characters22876
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1 Islamic Republic of Iran’s foreign economic activity evolution is affected to a large extent by changes in domestic political climate, political relations’ momentum with other countries, the shifts in global policy and macroeconomy. The sanctions regime has proved to be one of the key drivers affecting Iran’s foreign trade turnaround (or lack of it) in the Eurasian space. Sanctions’ sequences have mostly affected the vital export commodity of Iran – the oil sales abroad.
2

OIL EXPORTS AND U.S. ‘OIL SANCTIONS’

3 Twenty years ago, in 1997/98, the Western Europe contributed more than half of the Iranian oil exports, while the combined share of Asian oil importers (except for CIS countries) picked up to 46%. At the time, US energy sanctions of 1997 were yet to be fully in place. The share of European countries dropped to nearly 34% on the Asian countries' share expansion to almost 51% already by 2000 notwithstanding a new line named 'others' in the Iranian export oil statistics accounting for Turkey as part of Eurasian countries. Starting from 2017 European companies resumed oil purchases and their share recovered to about 40% in 2017/18 while the share of Asian countries grew to 60%. China, India, South Korea, Japan and Turkey have remained key Iranian oil importers nowadays. Owing to sanctions resumed by the United States in May 2018, many European and Asian companies in Europe and Asia again had to face a dilemma: Iranian oil imports or sanction-avoidance maneuvers. Furthermore, in August 2018, the United States banned the sale of US dollars cash to Iran, gold and other precious metals trade, transactions with Iranian rials, etc. The most sensitive ban for Iran proved to be the one on the purchase of Iranian oil, the main source of country’s hard currency income. In November 2018, the US gave out exemptions from sanctions to eight jurisdictions (Greece, Italy, China, Taiwan, Turkey, South Korea, India and Japan) that agreed to greatly reduce amounts of Iranian oil imports within the next six months, while the two European countries were to cut Iranian crude purchases to zero over the next few weeks. Shortly thereafter, the Turkish Tupras announced the oil purchase reduction for its refinery, although it is unclear so far how large the reduction would be. India is among the eight countries that were allowed to continue Iranian oil importing, but import volumes are already declining. Back in 2012–2015, during the previous round of US sanctions, India continued to buy oil in Iran, though significantly reduced the volumes. There is much to depend on the EU's efforts to establish the compensation mechanisms for the entities hit by sanctions, similarly on the payment instruments the countries may prefer to use. Early in November 2018, India signed a MoU with Iran, according to which Indian rupee payments would be accepted for Iranian oil (instead of US dollars), while Indian refineries would transfer funds for oil to the account of the National Iranian Oil Company (NIOC) via one of the largest Indian banks – UCO Bank. The Iranian side would use half of these proceeds as payments for the Indian export goods. Over the past two years Iran has become one of the main fuel suppliers for India thus the Indian government was one of the most active (among other states) standing up for the temporary release of anti-Iranian sanctions. China will surely remain the largest buyer of Iranian oil and gas condensate. Until September 2018, China imported more than 600 thousand barrels per day on average while the US permitted China to purchase from Iran just up to 360 thousand barrels per day. These limitations are not applicable for the joint Iranian-Chinese projects in Iran, where Chinese companies have a share of their own production. Following the resumed sanctions, the Total ended its participation at South Pars, and the Chinese CNPC replaced the French giant as an operator of Phase 11. (The contract had already presumed the exit option: in case the Total leaves, the CNPC would take it over.) Japan and South Korea reduced their purchases of liquid condensate as well.
4 Early in May, the United States did not extend the permit allowing 8 countries to buy Iranian oil in set volumes. Shipments of the pre-paid oil continue, and the probability for Iranian oil exporting to the Asian market going forward exists, although, for instance, in May 2019, China claimed the suspension of imports of Iranian oil.
5 Furthermore, on May 8, 2019, the US president approved sanctions on imports of metals from Iran drawn against both Iranian metal plants and importers of Iranian metals from countries of the region and Europe, which assets the US Treasury freezes. For Iran, this step is particularly sensitive, given that metal's products share in country's non-oil exports rose to healthy 9–10% [Iran Statistical Yearbook, 2016–2017 (1395), p. 458]. Consequently, last year, the Iran-EU trade turnover shrank 66% YoY.
6

IRAN’S FOREIGN TRADE GEOGRAPHICAL STRUCTURE

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