Sanctions relief: how far does the Geneva deal go?

By Nader Habibi 

The six-month interim agreement that was signed in early hours of Sunday between Iran and the P5+1 countries is a major achievement, which can pave the way for a permanent solution to the Iran nuclear crisis. The final document points to significant concessions on both sides that should not be underestimated. The sanctions relief that the P5+1 offered in this agreement is substantial and can have a significant positive impact on Iran’s dire economic conditions, despite being temporary. Some experts have claimed that this relief will have only a positive psychological impact on Iran’s economic climate, but a look at the specific components of the relief package point to potentially deeper impacts.

The sanctions relief package in the Geneva agreement has five major components: 1) Iran will gain access to a limited amount of its export revenues that have been inaccessible because of the financial sanctions, 2) removal of restrictions on exports of petrochemicals, 3) lifting of sanctions on sea transport services and cargo insurance, 4) lifting of restrictions on imports of parts and technology for Iran’s automobile industry, and 5) lifting of sanctions on gold trade.

Of these five measures, the first one – access to a few billion dollars of restricted funds – is the only relief that is more symbolic than substantial. Shortage of hard currency reserves or export revenues is not a major bottleneck for Iran’s economy at present, and the amount of funds that will become accessible is not substantial compared to the size of Iran’s foreign trade. The remaining four, however, are important and will make a big difference. The most important among these is the removal of restrictions on Iran’s auto industry. The automobile industry is Iran’s second largest industry after the oil and gas sector. In recent years its contribution to Iran’s gross domestic product has risen to as high as 10%, and its annual output reached a peak of 1.65 million vehicles in 2011, before suffering a 40% setback as a result of the sanctions in 2012. Lifting sanctions on Iran’s auto industry can lead to a significant increase in production activity in the short run and allow auto manufacturers to recall thousands of laid-off workers.

Iran’s petrochemical industry will also benefit from the proposed sanction relief. Iran exported $2-$2.5 billion worth of petrochemical products to Europe per year before sanctions, and it looks forward to restoring these exports under the Geneva agreement. Petrochemical exports to Asia and Africa did not suffer a substantial decline as a result of sanctions, but even exports to these regions are expected to increase with the reduction of restrictions on sea cargo transportation and cargo insurance. Iran’s petrochemical industry was one of the first industries to welcome the Geneva agreement on November 24.

Iran’s other industries and its commercial sector will also benefit from the lifting of sanctions against cargo insurance, although many international firms may still be reluctant to trade with Iran because of the threat of losing access to the U.S. market, which will remain in effect.

While benefiting the Iranian economy by partially easing restrictions on trade and financial transactions, the Geneva agreement will not result in a significant increase in the flow of foreign investment into Iran because of its limited scope and its short-term nature.

International investors are likely to remain cautious and hesitant until a permanent agreement is signed by Iran and the P5+1 nations.

There is no guarantee that the current six-month agreement will be successfully followed by a permanent solution. So far, domestic investors have reacted positively. The Tehran stock exchange index reached a new high record on Sunday after the announcement of the agreement. At the same time, the prices of hard currencies and gold coin, which are barometers of economic uncertainty, declined. The mood in the streets and in the bazaar appears positive for now.

Nader Habibi is Henry J. Leir professor of the economics of the Middle East in the Crown Center at Brandeis University, where he is also senior lecturer in the Department of Economics.