Deal Pol­i­tics

The geo-po­lit­i­cal com­po­si­tion of the re­gion is likely to change fol­low­ing the Iran-US deal.

Southasia - - FRONT PAGE - By Ha­dia Ma­jid Ha­dia Ma­jid is an As­sis­tant Pro­fes­sor of Eco­nom­ics at the La­hore Univer­sity of Man­age­ment Sciences.

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.

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