Iran's nuclear deal to impact Asia-Pacific economies

Irans nuclear deal to impact Asia-Pacific economies
South Pars gas field facilities as seen from a bus window in the southern Iranian port of Assaluyeh. The large Asia-Pacific economies are already key markets for Iranian oil and condensate exports, and key exporters of manufactures to Iran.

If key economic sanctions are lifted in the near future, this could significantly boost long-term bilateral trade opportunities between the Asia-Pacific region and Iran.



By Rajiv Biswas/Insight

Published: Tue 21 Jul 2015, 4:23 PM

Last updated: Wed 22 Jul 2015, 2:56 AM

The nuclear deal agreed between Iran and the P5+1 group of world powers has the potential to significantly increase Asia-Pacific trade and investment flows with Iran if the deal is implemented. A vote on a United Nations Security Council resolution was due to be held on Monday in order to endorse the Joint Comprehensive Plan of Action, or JCPOA, agreed between the P5+1 powers and Iran, which would be implemented 90 days later.
There are still significant political hurdles facing the deal in coming weeks, notably the 60-day review process by the US Congress. If the deal survives the various political hurdles, it could result in significant lifting of economic sanctions on Iran by 2016, once the International Atomic Energy Agency, or IAEA, verifies that Iran has implemented its nuclear commitments under the new deal. If key economic sanctions are lifted in the near future, this could significantly boost long-term bilateral trade opportunities between the Asia-Pacific region and Iran.
Iran is one of the world's largest emerging markets, and is the third-largest economy in the Middle East after Turkey and Saudi Arabia, with a total GDP of $360 billion in 2014 and a population of 78 million people. The large Asia-Pacific economies are already key markets for Iranian oil and condensate exports, and key exporters of manufactures to Iran.
China-Iran bilateral trade flows reached $52 billion in 2014, while India-Iran bilateral trade flows reached $15 billion in the 2014 financial year. If economic sanctions on Iran are lifted, it would make the country one of the most important emerging market opportunities for Asia-Pacific exporters.
Lifting of economic sanctions
Under the JCPOA negotiated between Iran and the P5+1 powers, international sanctions on Iran imposed under the United Nations Security Council resolutions as well economic sanctions by the US and EU on Iran would be lifted once the IAEA verifies that Iran has implemented its nuclear commitments made under the JCPOA. The economic sanctions that would be lifted under the JCPOA agreement concluded in Vienna include lifting of EU economic sanctions on Iran. Key economic sanctions on Iran would be lifted by the EU that would allow resumption of financial transactions with Iranian banks; restoration of Swift banking facilities; provision of insurance and reinsurance; trade finance support for Iran; imports and transportation of Iranian oil; and investment in the Iranian oil, gas and petrochemicals sectors.
Under the JCPOA, US economic sanctions on Iran that would be lifted would include financial transactions with Iranian banks and for insurance, reinsurance and underwriting. Other key sanctions that would be lifted include sanctions on sale of commercial aircraft and parts to Iran; shipping and transportation and transactions with Iran's energy sector. The impact of economic sanctions had a crippling effect on the Iranian economy since 2012. If there is a significant lifting of economic sanctions in 2016, this could provide a substantial boost to the Iranian economy as well as opening up significant new opportunities for long-term trade and investment ties with the Asia-Pacific region.
Iran trade ties with Asia-Pacific
An important economic boost for Iran will also come if oil revenues locked in international escrow accounts as a result of economic sanctions are released. India alone is estimated to owe $8.8 billion to Iran for import of oil products, with the payments withheld in escrow accounts as a result of economic sanctions.
However, even if international economic sanctions on Iran are lifted, the JCPOA deal allows sanctions to be rapidly re-applied in the event that Iran stops complying with its commitments under the agreement at any stage in the next decade.
Prior to the imposition of sanctions on Iranian oil exports, Iran's global oil exports were heavily dominated by exports to China, India, Japan and South Korea. If sanctions on oil exports from Iran are lifted, this would allow increased Iranian oil exports to its large Asian markets. With China and India projected to be key long-term growth markets for oil importation, bilateral energy ties between both the Asian Brics and Iran are likely to strengthen significantly over the medium term. For the Asia-Pacific region, Iran remains a key long-term supply source of oil and gas, with the world's fourth-largest proven oil reserves and the world's second-largest conventional natural gas reserves.
Both China and India are also likely to ramp up their efforts to establish strategic investments in the Iranian oil and gas industry. China is Iran's largest market for oil exports, and the easing of sanctions on Iranian oil exports in 2014 have already resulted in a 28 per cent rise in Chinese oil and condensate imports from Iran in 2014, reaching an annual average of around 549,000 barrels per day. Although Indian oil imports from Iran were significantly reduced in 2012-13 due to the impact of sanctions on Iranian oil exports, nevertheless Iran still accounted for 7.3 per cent of Indian oil imports in 2014, at around 277,000 barrels per day.
For China, Iran is an important part of its strategic geopolitical plans to establish a new Silk Road linking China to Central Asia, the Middle East and Europe, and Iran has become one of the founding members of the Asian Infrastructure Investment Bank. India has also had strong trade ties with Iran historically. Iranian President Rouhani has recently invited Indian infrastructure investment worth up to $8 billion into Iranian port and railway projects, and Iran has also raised the possibility of negotiating a free trade agreement with India.
For Japanese and South Korean exporters, the Iranian market provides long-term growth opportunities for exports of autos and auto parts, steel, electronics as well as opportunities in infrastructure construction.
Outlook
If international economic sanctions on Iran are lifted as a result of the nuclear deal signed in Vienna in mid-July, this will open up significant bilateral trade and investment opportunities between the Asia-Pacific economies and Iran. China is already Iran's largest trade partner, and both China and India are important potential future growth markets for Iranian oil and gas exports.
For both China and India, Iran is also strategically important from a geopolitical perspective, and this will further underpin the development of economic ties between the Asian Brics economies and Iran once international sanctions are lifted.
The writer is the Asia-Pacific chief economist at IHS Global Insight. Views expressed are his own and do not reflect the newspaper's policy


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