Iranian President Hassan Rouhani will be yucking it up at Davos this week, munching canapés, shaking hands and cutting deals with the global business elite. His message: Iran is open for business as the international sanctions regime begins to unravel. His nuclear chief bragged on Iranian state television that the "iceberg of sanctions is melting while our centrifuges are also still working."
The Obama administration disagrees: "Iran is not open to business," an official told reporters this week. "Nobody should misunderstand that point."
The Obama administration and its European allies are confident that, with the Geneva agreement that addresses Iran's illicit nuclear program having been implemented on Jan. 20, their carefully constructed Iran sanctions' architecture will not be eroded—that is, until they decide to lift the toughest sanctions in exchange for a final nuclear agreement.
The argument is this: Should Iran renege on the deal, the limited concessions the United States and other world powers are offering Iran in exchange for the dismantling of its illicit nuclear program are easily reversible. They are also adamant that the total value of sanctions relief is only $7 billion. "It's not going to be hard for us to turn the dials back or strengthen sanctions even further," President Obama claims, adding that he would "work with members of Congress to put even more pressure on Iran, but there's no reason to do it right now."
Regrettably, the administration and its allies may be wrong on all fronts. Bijan Khajehpour, a Vienna-based Iranian investment manager close to the Iranian government, noted, "the beginnings of a 'gold rush' mood in Tehran." Though that might be overstated for now, his imagery reflects the beginnings of a shift in market sentiment that the interim agreement unintentionally but predictably triggered. If Iran's economy recovers, the pressure on Iran's leaders to follow through on a nuclear deal lessens. At that point, President Obama may discover that he has lost negotiating leverage and can't turn sanctions off-and-on like a "dial."
Here's why: A cash infusion of $7 billion into Iran's troubled economy might not sound like a lot in today's world. But it represents roughly 35 percent of Iran's fully accessible overseas cash reserves, which are estimated at $20 billion. And the sanctions relief figure might be much higher and more difficult to reverse.
For one, the $7 billion figure does not factor in the psychological impact the Geneva deal has had on markets, businesses, and investors.
Before Nov. 24, when the framework agreement was signed in Geneva, even those who could conduct legitimate business with Iranian counterparts were hesitant to do so. Driven by fear of economic loss and legal sanctions, they were risk averse. The world had built an economic minefield around Iran that most businesses were loath to risk exploding.
The tide may now be turning. Though many legal restrictions remain in place, sanctions are as much about psychology as legalities. Greed is starting to overcome fear. Trade barriers, particularly in areas that are legal but frowned upon, have been significantly reduced. This has already improved the economic climate and already resulted in some illegitimate deals as companies test the waters. With the expectation of further sanctions relief soon, businesses might now take risks they would not even contemplate as recently as three months ago.
Just how good is the new economic climate in Iran? Trade delegations are flocking there to explore business deals. Companies are rushing to apply for export licenses to exploit the newly open humanitarian channels, which, for the first time since the U.S. Embassy takeover in Tehran in November 1979, will include civil aviation components' exports to Iran. Chambers of Commerce and industrial councils are organizing seminars to help companies navigate the vagaries of the newly relaxed sanctions' regime and offer advice—as well as connections—to advance business with Iran.
There is also the remarkable recovery of the rial. After a three-year free fall that took Iran's currency from the official 10,308 to $1 dollar rate in 2010 to a crippling 38,500 in September 2012, the rial has now climbed back to 24,873 (as of January 21). Global auto companies are returning to Iran to renew business relationships in a sector that, until sanctions, provided almost $50 billion in annual Iranian GDP. Iran's stock exchange is also surging on renewed investor confidence, including in the petrochemical sector, which experienced steep price rises immediately after the Geneva agreement was signed.
More broadly, the Iranian economy, which had been beset by high unemployment, negative growth and hyperinflation, has been showing signs of modest growth and stabilization since sanctions pressure eased starting in mid-2013 and expectations of an economic recovery soared after Rouhani's election. And that was before the Jan. 20 implementation of the Geneva deal.
According to the World Bank's most recent data, Iran's GDP shrank 2.9 percent in 2012 and 1.5 in 2013, but it is now expected to grow by a modest 1 percent this year, and 1.8 percent in 2015. The IMF also sees Iran's economy beginning to rebound with an estimated growth rate of 1.3 percent and 1.98 percent in 2014 and 2015 respectively.
The $7 billion in sanctions relief also does not include the Geneva agreement's suspension of U.S. oil sanctions over the next six months—worth between $4.5 and $5 billion in oil revenue that Iran would have otherwise lost. This relieve importers of Iranian oil from their obligation to reduce their purchases every six months and further takes the pressure off Iran's oil sector. Without this relief, Iran was close to running out of storage capacity for its production surplus and in danger of incurring irreparable losses stemming from the forced closure of oil fields.
Under the Geneva agreement, Iran also benefits from regaining access to affordable insurance policies for the transportation of its oil and other goods. Premiums will drop. There will be reduced transaction costs to service shipments of crude. And Iran can cease to rely on foreign-owned vessels to ship merchandise.
And that's not the end of it. The banking channel that will now be opened for some transactions—and the tenfold increase of authorized transactions by European Union banks to Iran for legitimate trade—will not only boost trade but also reopen a window into the international financial system that Iran had been denied through U.S., European and U.N. sanctions. The U.S. Treasury Department has read the riot act to overseas financial institutions about abusing these limited financial openings. But fears are growing that Iran will exploit financial loopholes to develop another "Halkbank," an elaborate "gas-for-gold" scheme that saw Iran allegedly working with Turkey's state-owned bank, Turkish gold traders, and shady middlemen, to access more than $100 billion. Bribes reportedly associated with that gas-for-gold have resulted in the corruption charges that are now rocking Turkey's government.
This Turkish scandal raises questions about why Washington didn't crack down on this massive financial scheme. And now Moscow is issuing a similar challenge. The recently revealed oil-for-goods deal between Russia and Iran, reportedly worth $1.5 billion a month, could provide an additional $18 billion annually to Iran, easing further pressure on Iran's battered energy sector and at least partially restoring Iran's access to oil customers with Russian help. And those sums don't include the potential for further Iranian-Russian illicit finance and sanction-busting shenanigans that the deal could provide.
The Obama administration has already denounced the Russian deal as contrary to the interim agreement and a violation of U.S. sanctions, but will President Obama take on Vladimir Putin, on whom he now depends to get both Tehran and Damascus to abandon their WMD programs? If Washington can't stop this deal, will that be a signal to other countries that the United States won't risk major diplomatic disputes to preserve the sanctions regime?
The Obama administration has already dispatched Treasury's top sanctions official, David Cohen, to global capitals to convey the message to policymakers and the business community that nobody should rush to Tehran just yet. There are no more able and committed public officials than Under Secretary Cohen and his sanctions enforcement team. But can they restore fear in the international markets and prevent a psychological shift inside and outside Iran that doesn't weaken American negotiating leverage? As a European diplomat familiar with these conversations noted to us, the administration is failing to persuade—after all, as he noted, its message is now hopelessly muddled: releasing billions of dollars for Iran to spend and lifting sanctions on key Iranian economic sectors while telling the business community that no one should rush back to Iran.
The Obama administration is cementing the impression of an Iranian economy increasingly open for business in another important way—by blocking new legislation co-sponsored by 59 Democratic and Republican senators and a House bill that passed in July 2013 by a vote of 400-20. Senators have tried to strengthen the administration's message by introducing "sanctions-in-waiting" legislation to keep a Sword of Damocles over international markets, to enforce Iranian nuclear compliance and to impose an economic cost on Tehran if its continues its terrorist and ballistic missile activities.
The proposed legislation would lend credibility to the administration's message that this is the wrong time for companies to go streaming back into Iran. It would also impose a heavy price on sanctions busters who bet incorrectly that Iran will comply with its Geneva nuclear commitments, not launch or support terrorist attacks directly or by its proxies against Americans, not test intermediate-range ballistic missiles that threaten American allies, or meet the international community's requirements for an acceptable deal within 12 months.
With the White House committed to killing any new congressional measures, the Obama administration is making a bet that it can prevent the unraveling of the sanctions regime and maintain a strong negotiating hand to peacefully resolve the Iranian nuclear crisis. The president of the State Department's leading state sponsor of terrorism, who is shaking hands this week with the Davos global elite, appears to think otherwise.