Iran's economic recovery from sanctions won't come overnight, experts say

Iranians celebrate in northern Tehran on July 14 after their nation's nuclear negotiating team struck a deal with world powers in Vienna.

By Carol J. Williams, Ramin Mostaghim

July 15, 2015 6 AM PT

Reporting from Tehran — Major oil companies like Shell and car manufacturers like Peugeot Citroen have already opened talks with potential Iranian partners in anticipation of the lifting of sanctions envisioned as part of the historic nuclear accord announced in Vienna.

The public jubilation that broke out after word of the agreement Tuesday also spoke to Iranians’ huge expectations of economic dividends now that their government and six world powers have sealed the deal to curb Tehran’s nuclear ambitions.

But experts familiar with the demanding verification requirements to ensure that Iran doesn’t develop the ability to build nuclear weapons warn that relief probably won’t be felt until well into next year. And with a U.S. trade embargo against Iran still in place until Congress lifts it, opportunities for the return of American goods to Iranian markets are limited to a few exempt sectors, such as civilian aircraft.

The timing of sanctions relief was one of the most difficult issues in the negotiations that blew through three deadlines and took two years to complete instead of the initially anticipated six months, said Philip Gordon, a former State Department official with Middle East expertise now at the Council on Foreign Relations.

“There’s definitely a feeling in Iran that this has been a huge breakthrough and that sanctions relief will immediately improve the economy,” Gordon said. “That’s probably overstated. It won’t come on Day 1. They first have to do these nuclear steps which they say will come quickly but we estimate will take some time.”

Though relatively small tranches of frozen bank deposits have been released over the last two years as negotiations progressed, Iranian access to the estimated $100 billion held in international accounts won’t be allowed until United Nations nuclear agency inspectors verify that Tehran has met the commitments contained in Tuesday’s accord. Under the agreement, Iran must drastically reduce the number of uranium-enriching centrifuges, cut its stockpile of nuclear fuel and convert an underground enrichment site to a research center.

“No doubt there are countries around the world that will show interest in Iran but they are going to be cautious that they are not making investments in a place where there has been economic mismanagement, and where if the deal isn’t implemented they could face ‘snap-back’ that could bring sanctions back in place,” Gordon said. “So it may be that countries don’t rush in as quickly as Iranians hope.”

The American business community in particular has been taking a wait-and-see attitude before sinking major capital into joint ventures with Iran in the limited spheres allowed under the U.S. trade embargo, said Suzanne DiMaggio, director of the Iran Initiative at the New America think tank.

“Clearly there’s a lot of anticipation because Iran represents a great potential market for U.S. products and services,” DiMaggio said, noting that Iran’s population is highly educated, largely urban and young — 60% are younger than 30.

A senior administration official issued a reminder soon after the nuclear deal was announced that barring congressional action, most U.S. companies will continue to be shut out of Iran.

“We are not removing our trade embargo. U.S. persons and banks will still be generally prohibited from all dealings with Iranian companies, including investing in Iran,” said the official, who briefed reporters in a conference call from Vienna on condition of anonymity. The only adjustments to the embargo as a result of Tuesday’s agreement will allow U.S. firms to import food and carpets from Iran and to export civilian aircraft and parts to Iran, the official said, adding that Iran has “one of the worst airline safety records in the world.”

If Iran complies with the prerequisites for getting international sanctions lifted, pressure from U.S. companies wanting to get into a hungry market of 80 million people could chip away at the Republican-controlled Congress’ resistance to ending the embargo.

The bite of sanctions into Iranians’ prosperity and quality of life has been profound, DiMaggio said, pointing to shortages of essential medicines and the prohibitive costs of what imports have been allowed in since the U.N. sanctions went into effect in 2006.

Iranians struggling through double-digit unemployment, high inflation and indigence, with 1 in 5 citizens living below the poverty line, express eagerness to see foreign investment that creates jobs and boosts growth.

The United States slapped on additional restrictions in 2012 that crippled Iran’s energy trade and cut it off from international banking. The country was mired in recession for two years, until the 2013 election of moderate President Hassan Rouhani and his launch of negotiations with foreign powers over development of Iran’s nuclear capabilities.

Iran’s Oil Ministry has said it hopes to attract $100 billion in foreign investment once sanctions are removed to modernize the energy sector — a potentially lucrative opportunity for non-American oil majors like Anglo-Dutch Shell and Italy’s ENI, which have already been courting Iranian partners in anticipation of the nuclear accord. Iran has the world’s second-largest deposits of natural gas and the fourth-largest oil bounty.

Oil production has dropped below 3 million barrels per day since the U.S. sanctions went into force, and exports have dropped by nearly half over the last four years, from 2.5 million barrels a day to 1.3 million this year.

Aviation and auto-making industries are also poised to return to the Iranian market after years, and sometimes decades, of suspended trade and discord.

Najmedin Meshkati, an Iranian-born USC engineering professor and a State Department advisor in the first Obama administration, points out the alluring opportunity for aviation giant Boeing if economic recovery allows Iran to replenish its aging aircraft fleet. Iranian airlines have been cut off from purchasing from Western aeronautics manufacturers because most use significant American-made components, such as engines and navigation equipment, compelling Tehran to instead lease aging Russian-made aircraft, Meshkati said.

“Air traffic control, anything related to civil aviation — hardware, software, training, safety management — these are all sectors in which U.S. manufacturers have supremacy,” he said.

Times staff writer Williams reported from Los Angeles and special correspondent Mostaghim from Tehran.

Twitter: @cjwilliamslat