The geo-political composition of the region is likely to change following the Iran-US deal.
The Iran-US deal is unprecedented in several aspects. While the primary purpose of the agreement is to prevent Iran from acquiring nuclear weapons, the checks built into the accord are unparalleled in their stringency. Not only does the deal makes it extremely difficult and highly unlikely that Iran will be able to cheat, but it also effectively prevents Iran from acquiring any weaponsgrade plutonium for at least 15 years, with some of the restrictions staying in place for as many as 25 years. By agreeing to such strict terms, the Iranian government has clearly signaled their eagerness to step back into the global market.
So what does Iran’s re-entry signify?
The first factor that comes to mind relates to Iran’s crude oil reserves. Iran has the world’s fourth largest reserves, and with the 2012 EU restrictions that banned insurers from covering ships carrying Iranian oil, it is estimated that the country has placed around 30 to 40 million barrels in storage. While sanction relief is unlikely to occur until the first half of 2016, once it does set in, Iran cannot only begin to sell its oil in storage but it can also begin to ramp up its production. However, any concerns that Iran’s re-entry into the oil market will drastically depress prices are unfounded as, one, it is unlikely that Iran will unload all of its stored oil at once, and two, bolstering production in its existing fields which has seen a significant decline due to the sanctions, will require considerable foreign investment. While the moderation in sanctions post the nuclear deal will help improve FDI flows into the country, especially given that the ban on SWIFT, the financial-messaging system used to transfer money from the world’s banks will also be effectively lifted. Exactly how much investment the Iranian government is able to attract will depend heavily on how quickly and effectively it is able to roll back the significant red-tapism currently operating within the Iranian economy.
As economic sanctions are lifted, investments will not only flow into the
Iranian economy but it is also likely the country will play a greater economic role in the region. In this regard, the existing role of Iran in Afghanistan’s economic development will only deepen. The region will also begin to see several energy related projects move towards fruition, such as the proposed Iran-India-Pakistan pipeline. Moreover, given Iran’s 77 million-plus population, as its consumers enter the global market, it is expected that trade in the region will see a huge boost. Specifically, it is expected that Iran’s fourth largest trading partner, Turkey, will see a boom in its retail and services sectors. Similarly, countries like Kazakhstan, Uzbekistan, and Turkmenistan which are hemmed in by a war-torn Afghanistan and a sanctions-hit Russia are particularly eager for the economic opportunities that the opening up of Iran represents. Incidentally, the already existing Kazakhstan-Turkmenistan-Iran Railway will prove instrumental in integrating these markets that much quicker. At the same time though, countries like Turkey will remain wary as Iran is a competitor in the industrial and energy sectors and can potentially swing FDI away from other economies in the region.
Iran’s geostrategic position is especially relevant in the situation arising from the Iran-US deal. As China-Russia cooperation continues, the linking of Central Asia with South Asia via Iran will only become increasingly relevant for improved regional cooperation. In this, the economic and especially the political role of Iran is of particular concern to international observers. With Delhi and Beijing bidding for the Chabahar port on the Gulf of Oman, and a proposal for an India-Russia-Iran transport corridor into Central Asia already in the works, how Tehran plays its cards with regard to the port and the corridor may provide significant insights into Iran’s envisioned role in the region.
While the points discussed so far touch largely upon the economic implications of the Iran-US deal, the biggest concern relates to the significance of the accord with regard to the geo-politics of particularly the Middle East. Given Iran and Saudi Arabia’s tumultuous history and their continuing proxy wars in Yemen and Syria, as well as the animosity between Iran and Israel, the United States’ willingness to negotiate with and enter into the pact with Iran may be interpreted to mean that the superpower is looking to set up a new ally in the region.
With regard to Iran’s motivations, it seems that rather than political these are primarily economic in nature since the sanctions were crippling the country’s energy-dependent economy. The US motivations are considerably more difficult to untangle. The US had been looking to negotiate a nuclear deal with Iran for nearly a decade now. At the same time, although the US continues to support its Saudi allies while also maintaining its pro-Israel stance, some analysts believe that the timing of the deal is not just driven by the election of the moderate Iranian president. Rather, it is the continued consolidation of the Asian region as well as its new trade routes and economic cooperation which may well spell a reduction in the US global market share that has led the US to introduce a new player in the economic and political arena of the area.
The nuclear deal undoubtedly signifies a huge set-back in terms of Iran’s nuclear ambitions, yet the economic implications of the agreement are largely positive for the country. While the re-entry of Iran in the global arena has positive spillovers for its trading partners, it also means that these same countries are now looking at a new competitor in the region. Even with Iran’s potential to re-direct FDI away from other regional economies, it is expected that as sanctions are lifted, the associated regional economic opportunities, particularly with regard to new trade and energy routes, will lead to greater trade creation as opposed to trade diversion for all countries concerned.