With the Joint Comprehensive Plan of Action, Tehran looks to the West. The agreement on the future of Iran’s nuclear program, signed in Vienna last month with representatives of the P5 + 1 (USA, Russia, China, France, UK and Germany), opens the country for business. The opportunities for Italy could be great. We interviewed Andrea Mennillo at Milan Expo, on the occasion of the National Day of the Islamic Republic of Iran, about what to expect next.
1. An important meeting just took place in Milan, perhaps paving the way for renewed collaboration between Italy and Iran. Is it possible to be optimistic?
Let’s start with a fact: The agreement between Tehran and the world powers on the future of the Iranian nuclear program has already been reached. Federica Mogherini, the Italian High Representative of the EU, during the meeting with Iranian Foreign Minister Mohammad Javad Zarif, was very optimistic. Zarif himself defined the agreement as “historic,” both because it paves the way for improving relations in the Middle East, and because in this moment it offers the Italian economy new oxygen to return to growth.
2. There are those who fear that with billions of assets now freed up (at least $100 billion), Iran can finance extremist groups, terrorists or governments considered enemies of the West. How real is this danger?
I am confident that Iranians will honor their commitments. It will be crucial to be able to read in real time the evolution of internal equilibrium between the country’s soft and open wing and its hardline wing. Personally, I am confident that the agreement will increase President Rowhani’s popularity in view of the 2016 parliamentary elections and the 2017 presidential elections, favoring the moderates over the radicals. There is, of course, a risk, but let’s not forget that arms embargoes will remain in force for at least the next five years and, through periodic checks by the EU, US and various international bodies, such as UN and IAEA (International Agency for Atomic Energy), it will be possible to block any violation of arms treaties. If there are any violations, the agreement may be dissolved. But this result would be a defeat for everyone, because it is not with sanctions that we solve problems.
3. A study by the Confindustria underlined that progressive elimination of sanctions will have a direct impact on the Iranian economy’s growth. Which tools can be used to create the basis for closer cooperation?
It is evident that sanctions have significantly penalized the Iranian economy. Without them, the GDP of the country could have been 20 percent larger. From next year, we could see a recovery in growth and a gradual normalization of the economy. First of all, a decline in inflation could occur, with the abundance of liquidity in the market and the recovery of the domestic demand. Furthermore, Iran will need infrastructure to fill the gap in oil production, which was blocked under sanctions. Italy can exploit major commercial opportunities, using tools such as export credits and project financing for infrastructure. Those levers were, in recent years, off limits because of sanctions. Made in Italy will play a prominent role, aspiring to win market share through excellent diplomatic and commercial relations between the two countries. It should also be noted that Iran has 14 economic zones and seven free trade areas, where foreign investors enjoy tax exemptions for a period of 20 years, with free movement of capital and no import duties. Oil will be a major opportunity for the Iranian economy (it is estimated that more than one million barrels per day will be added to the world market), but it will take time and investment to fully exploit. There is still an element of uncertainty linked to crude oil’s price trend, however: In a downward trend, placing Iranian production on the market would drastically reduce returns from this industry.
4. Speaking of Made in Italy, we are obliged to ask you about the opportunities for the Italian exports.
This topic was recently raised by our Minister of Economic Development, Federica Guidi, who underlined the importance of re-linking economic and commercial relations with a historic partner like Iran. For Italy, there is a chance to again access a market of 80 million potential consumers. According to Foreign Trade Institute estimates, over the next four years we could witness an increase in Italian exports of up to €3 billion. With the end of the sanctions, large Italian companies will be able to come back to Iran. One example is Eni, which never left the country after the introduction of sanctions, and will certainly consider the idea of returning to further invest in Iran. Italian products and know-how are still highly appreciated in the Iranian market and the recovery of a collaborative approach will definitely be positive for our business. Great opportunities could also come from mobile and automotive sectors, for example. With demographic growth, there will be the need to build new houses, hotels or offices. Important potential will come from the fashion market, with its world-leading luxury brands. Italy definitely must have the luxury market in its sights in order to gain advantages amid very strong competition, especially since China, Russia and India, free from the constraints imposed by the embargo, had the opportunity to consolidate their positions on the Iranian market.
5. Expectations are very high, but how reliable is Iran as a partner? When making investments in a country like Iran, what guarantees does it offer?
Despite the Vienna agreement, risks remain because of problems associated with the long-term effects sanctions had on the Iranian economy. The financial and commercial restrictions imposed by sanctions had a negative impact on the soundness of the state. Financial market isolation forced banks to adopt severe measures that weighed on liquidity levels. On the whole, economic and financial risks are high, but it is not necessary to be put off investing in Iran. The Sace Group, which secures investments by Italian companies abroad, has noted that the risk of non-payment is also high in the private sector (banks and corporations) and, investments in emerging markets always imply major risks linked to economic and political uncertainties. But Italy does not have to give up when the process has just begun. Our companies must have the courage to invest by taking advantage of this opportunity and leveraging their numerous outstanding qualities. New economic initiatives can only be positive for the future of our country.