Opinion

Europe must wake up before Iran falls into the arms of Russia and China

European leaders seem to have been caught somewhat off-guard by the Iran deal. The Greek saga alone could explain this. The problem is that other competitors —Russia and China— are one step ahead.

By: Date: August 3, 2015 Topic: Global Economics & Governance

This post was originally published on The Financial Times Blogs

Everybody seems to be greedily eyeing potential business deals with Iran after the nuclear deal reached with six world powers. This is no surprise. Iran’s economy is larger than Australia’s and twice as large as Iran’s successful neighbour, the UAE. More importantly, Iran is set to grow even faster. In fact, even under the most conservative projections (before the deal was signed), Iran was set to contribute nearly as much as Italy to global growth in the next decade: some $270bn. Beyond its large and starved domestic market after so many years of sanctions, Iran’s oil and gas reserves are the jewels in the crown.

European companies expect to be at the forefront of the gold rush. Europe’s relationship with Tehran has been less confrontational than that of the US. Europe also has a history as a major oil importer from Iran. Pre-sanctions, Europe’s oil bill was some 600,000 barrels a day, with most going to Italy, Greece and Spain. Furthermore, Iran’s gas reserves, the second biggest in the world, could eventually make their way to Europe, reducing the continent’s dependence on Russia. While there are many obstacles to an Iran-to-Europe pipeline, there are cheaper alternatives, such as shipping liquefied natural gas. More generally, modernising Iran’s oil industry requires huge investment, estimated at $100bn. Machinery and plant construction will be needed, areas in which Germany is the global leader.

Beyond energy, a wealth of other opportunities could be grasped by European companies, especially on consumer goods, German and French car makers could be big winners since there is huge untapped demand after years of sanctions. In the same vein, the aviation industry should also benefit, because at least 300 aircraft will need to be renewed over the next decade. This could be a big shot in the arm for Airbus.

Unfortunately, European leaders seem to have been caught somewhat off-guard as regards Iran’s opening up. The Greek saga alone could explain this. The problem is that other competitors have already stolen a march and this is not the US, as it could appear as first sight by looking at the newspaper headlines. Europe’s key competitors to make business with Iran are Russia and China.

Although Iran’s historical relationship with Russia has not always been cordial, President Vladimir Putin has become more of a partner as both countries fight against Sunni insurgent groups, such as the Islamic State. Furthermore, Russia was one of the key players pressing for a positive outcome from the nuclear negotiations and there seems to be no doubt that Iran will be grateful.

Europe’s main rival, however, could prove to be China. China is much more complementary to Iran than Russia, thanks to China’s insatiable thirst for energy. In fact, Chinese-Iranian trade reached $44bn in 2014, almost a third of Iran’s total foreign trade and a fourfold increase from 2005. Beyond trade, foreign direct investment is probably even more relevant, although no official figures exist. Anecdotal reports indicate that Chinese FDI spans transportation, power generation, mining, the auto industry and oil and gas.

From the west’s perspective, China’s involvement in Iran during the embargo years could be seen as non-compliant with international agreements. In the eyes of the Iranian government, though, Chinese trade and investment provided a badly-needed economic lifeline to Iran during the long years it suffered under unfair sanctions. One of the rewards for such support is already in China’s hands: billions of dollars in oil infrastructure projects. Beyond the money, Chinese-Iranian ties are reinforced because they both have long histories and ancient cultures, and the shared sense that they are both victims of western imperialism. Oil is only one of the sectors that will link both economies. Many more will appear with China’s “Belt and Road” initiative, which is becoming an increasingly relevant project for Chinese infrastructure corporations in the light of China’s slowdown.

In summary, the west possesses the technology that Iran will need to rebuild its shattered economy, but there is a trust deficit. Although Europe is on better terms with Iran than the US, Europe’s close adherence to US foreign policy makes it hard for Europe to compete with Russia and China for Iran’s trust. It was Russia and China that worked to blunt the west’s hawkish demands and ease sanctions.

If Europe wants its slice of the pie, it should urgently come up with a strategy to build up trust with Iran. I wonder whether anybody in Brussels will be listening.


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