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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Balancing free trade with national security interests

In this episode of Director's Cut, Stephanie Segal of CSIS joins Bruegel's Guntram Wolff and Maria Demertzis for a conversation about the tension between free trade and national security issues, and the emerging threats to multilateralism.

By: The Sound of Economics Topic: Global Economics & Governance Date: February 19, 2019
Read article

Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: Georgios Petropoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 15, 2019
Read article More on this topic More by this author

Blog Post

How the EU could transform the energy market: The case for a euro crude-oil benchmark

There is a strong case for an oil benchmark in euros. Trading energy markets in more than one currency is not unprecedented, and indeed used to be the norm. Europe – with its powerful currency and reliable regulatory environment – should stand a good chance of success.

By: Elina Ribakova Topic: Energy & Climate Date: February 13, 2019
Read about event

Past Event

Past Event

Is the European automotive industry ready for the global electric vehicle revolution?

How can Europe catch up on the global electric vehicle race?

Speakers: Eric Feunteun, Jacques Pieraerts, Julia Poliscanova, Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 12, 2019
Read about event More on this topic

Past Event

Past Event

The world’s response to China’s Belt and Road Initiative

This event will look at the Chinese Belt and Road Initiative as well as the response from the rest of the world.

Speakers: George Cunningham, Uri Dadush, Jean-Francois Di Meglio, Theresa Fallon, Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 8, 2019
Read article Download PDF More on this topic

Policy Contribution

Russia's growth problem

After the 2014-2016 currency crisis, Russia’s economy has returned to growth, albeit at a slow pace. In this Policy Contribution, the authors analyse the potential causes of mediocre growth performance, as well as its impact on Russia's economic and political relationships. They also include their recommendations for the future.

By: Marek Dabrowski and Antoine Mathieu Collin Topic: Global Economics & Governance Date: February 7, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Reflections on five years of China's Belt and Road Initiative

Bruegel fellows Alicia García-Herrero and Uri Dadush join Guntram Wolff for this Director's Cut of 'The Sound of Economics', focusing on the progress made by China's Belt and Road Initiative, how it will continue to develop, and the reactions it has stirred across the world.

By: The Sound of Economics Topic: Global Economics & Governance Date: February 7, 2019
Read article Download PDF More on this topic

Working Paper

Countries’ perceptions of China’s Belt and Road Initiative: A big data analysis

Drawing on a global database of media articles, the authors quantitatively assess perceptions of China’s Belt and Road Initiative (BRI) in different countries and regions. They also identify the topics that are most frequently associated with the BRI.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: February 6, 2019
Read article More on this topic More by this author

Blog Post

Chinese growth: A balancing act

China’s GDP growth in 2018 was 6.6%, its lowest annual growth rate in more than two decades, and the rate is expected to slow further this year. What is driving the slow-down in Chinese growth and what are the implications for Chinese policymakers and the global economy? This post reviews the blogosphere’s take.

By: Konstantinos Efstathiou Topic: Global Economics & Governance Date: January 28, 2019
Read about event More on this topic

Past Event

Past Event

Rules-based trading system and EU-Australia

At this event the Australian Minister for Trade, Tourism and Investment, Senator the Hon Simon Birmingham will speak about Australia-EU bilateral trade, the FTA negotiations and the importance of multilateral rules-based trading system

Speakers: Senator the Hon Simon Birmingham, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 22, 2019
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read article Download PDF More on this topic

Policy Contribution

The Belt and Road turns five

Five years after its launch, Michael Baltensperger and Uri Dadush reflect on China’s Belt and Road Initiative. The plan to revive ancient trade routes has the potential to enhance development prospects across the world and in China, but that potential might not be realised because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated.

By: Michael Baltensperger and Uri Dadush Topic: Global Economics & Governance Date: January 10, 2019
Load more posts